The financial shakeout from COVID-19 will be felt in superannuation holdings for at least 10 years, research shows.
And self-managed super funds (SMSFs) are in for a particularly bumpy ride – with their funds under management in December 2029 forecast to be 60 per cent lower than expected before the virus.
Research by DEXX&R found that SMSF balances are now likely to total $375.2 billion by December 2029, whereas before the pandemic they were predicted to reach $923.3 billion.
Industry funds performing better
Industry funds are predicted to fare much better, but their balance in 2029 will still come in 31 per cent lower than previously expected, at $923.3 billion.
DEXX&R predicts personal super (extra contributions made to retail funds) will be 41 per cent below expectations, at $259.63 billion, and employer-sponsored retail balances 23 per cent lower, at $194.83 billion.
A number of factors will drive the lower-than-expected outcomes, according to DEXX&R managing director Mark Kachor, and both SMSFs and pooled funds will experience a significant fall in funds under management (FUM) this year.
(FUM does not necessarily equate to individual member returns, as it looks at the total funds held, rather than the balances of individual accounts.)
“In the short term, the COVID-19 pandemic is projected to result in a $108 billion fall in FUM [for SMSFs] by December 2020. This equates to a 15.7 per cent drop from $690 billion in December 2019 to $582 billion,” he said.
Factors driving the fall include the “impact of the Early Release Super program (already at $30 billion and open until 2021), depressed equity markets and dividend returns, lower interest rates and the reduced capacity of members to boost future contributions,” Mr Kachor said.
With Australian share investments accounting for almost 50 per cent of their holdings, SMSFs will be hit hard by suspended dividend payments and dividend reductions, which were likely to remain “at substantially lower levels than those paid over the past 10 years,” he said.
Australian blue-chip stocks have paid far higher dividends than their international counterparts and SMSF members have relied on these for tax-free income, often boosted by the cashing out of franking credits.
Members of industry funds and retail funds will also be affected by the cuts to dividends, but not to the same extent as SMSF members, as they have relatively less exposure to Australian shares in general and the big four banks in particular.
Cash is a problem
SMSFs are also highly exposed to cash (about 35 per cent) and savings account rates are likely to be low for some time, DEXX&R found.
SMSFs will be hit by a double whammy effect, due to their older average membership base. This means their membership will increasingly be retiring and making no contributions while simultaneously drawing down on funds.
For pooled superannuation funds, the results will be similar to SMSFs through 2020, with overall pooled FUM declining 15.8 per cent, or $347 billion to December 2020.
However, over the longer term, pooled funds will do better than SMSFs because they have a younger membership base and are less exposed to Australian equities (about 26 per cent) and have far less cash (3.8 per cent), DEXX&R found.
Retail super funds owned by the major banks are under pressure on another front, Mr Kachor said.
“They are suffering resumptions as members choose to go elsewhere as a result of the negative publicity that came their way as a result of the Hayne banking royal commission.”
High unemployment will also be a significant drag on industry funds in particular, as they have lots of members in industries that have been hard hit by the lockdown, such as hospitality and retail, and unemployed workers can’t make super guarantee contributions.
“We think it will take three to five years to get unemployment back to between 6 and 7 per cent,” Mr Kachor said.
The weak labour market will also result in lower wage growth and more workers working less hours than they would like.
“A total of $11.3 billion in SG contributions will be lost if unemployment remains at 10 per cent until December 2021, falls to 8 per cent in the year to December 2022, and 6 per cent in the year to December 2023,” Mr Kachor said.
All up, the earnings inside all pooled super funds are expected to fall to an average of 3.6 per cent over 10 years, compared to pre-pandemic levels of 5.4 per cent, DEXX&R found.
Sharemarket economist David Bassanese of BetaShares said he thought predictions of lower for longer sharemarket returns might be overly pessimistic.
This time it’s different
“This recession has been different to others in the way the sharemarket has reacted. Typically the market drifts lower for a year or so then starts to pick up,” Mr Bassanese said.
“This time we took the loss all upfront and we have seen a gradual recovery. The Australian market is off 18 per cent, the [US tech market] NASDAQ has recovered and the [US benchmark] S&P 500 is within a whisper of its highs. Globally, markets are down 12 per cent.
“Bond markets are actually higher as interest rates have fallen further and although markets can get it wrong for a time they are ultimately right.”
So, the outlook for superannuation might not be as gloomy as some suppose, he said.
The New Daily is owned by Industry Super Holdings