A big conversation is under way in the superannuation industry about the necessity for members to be more engaged with their super.
But the evidence suggests taking super into your own hands is not necessarily going to give you a better retirement balance.
SuperRatings data shows default or ‘MySuper’ funds deliver more money to members than the average super fund across the entire sector – and default funds are what your employer will put you in if you don’t make another choice.
Default funds had median annual returns of 6.3 per cent over the three years to February 2021 and 8.5 per cent over five years.
This compared to 6 per cent and 8 per cent respectively, for funds across the whole sector with investments in the balanced option of 60 to 80 per cent growth assets, which is the typical allocation of default funds.
The top 25 per cent, or quartile, of default funds returned 6.9 per cent over three years and 8.7 per cent over five years.
Default funds also did better over three years than funds with a high growth rather than balanced asset allocation, which returned 6.8 per cent annually over that timeframe.
But high-growth funds edged out defaults over five years, with the former registering a median annual return of 9.2 per cent over that timeframe and the latter clocking a median annual return of 8.7 per cent.
The three-year figures for all categories are lower than those for five years because of the effects of last year’s COVID-19 sharemarket slump.
Here’s why default funds are leading the charge
Default funds have higher median returns than the average balanced fund for several reasons.
Probably the most significant is that legacy retail, or for-profit, superannuation funds have lower returns than the not-for-profit sector.
In 2018, the Productivity Commission (PC) reported that over the 13 years to 2017 retail funds returned an average of 5.12 per cent while not-for-profit funds returned an average of 7.1 per cent.
Some retail funds have broken into the top echelons of the default sector, as the below chart shows.
But they have come onto the scene as a result of reforms introduced from 2014, and tend to have low cost structures like not-for-profit funds.
“There are some issues around size and the diversity of the investment portfolio in the default sector,” Dr Jackson said.
“Those MySuper accounts take on a lot of new members and so they’re managing a lot of funds, and they potentially have the ability to spread risk over a longer period and that helps them to do better overall.”
Because most workers go into default funds, a growing workforce feeds into expanding fund membership, which allows the funds to invest growing amounts of money in long-term assets like private equity and infrastructure.
They can invest in these types of assets without worrying about having to sell early to pay out an ageing membership as they retire, as is the case for many traditional retail funds.
Interestingly, the best-performing default funds, while often in the industry fund category, don’t include some of the best-known names in that sector.
Top of the class
The top-performing default fund is UniSuper, which returned an average of 9.2 per cent annually over the five years to February 2021.
It’s an industry fund, but membership is restricted to university staff and their families, and unlike other default funds, it doesn’t make a lot of direct investments in infrastructure.
Second place on the list is retail fund Australian Ethical, which has built a very successful business on the move towards ethical investment.
Other big-name funds in the top 20 include industry giant AustralianSuper, and the corporate funds run for the employees of Telstra and ANZ.
However, just because default funds do better on average than the typical superannuation fund does not mean members should be content to stay with them without investigating their performance.
“The important thing to note is that even within MySuper, there are very-well-performing funds and not-such-well-performing funds,” Dr Jackson said.
“It still pays for people to have a really close look at their fund’s performance and not take those averages as given.”
It’s a crucial point as staying in an underperforming fund could cost members dearly.
The PC found that being in a bottom-quartile fund could leave someone starting work on $50,000 with a balance at retirement of $560,000, compared to $1.2 million had they been in a top-quartile fund.
Former Industry Super Australia chief economist Stephen Anthony said members needed to pay close attention to fund performance and not be lulled by the high returns of the past decade.
“There could be a significant drawdown in fund values because of a changing economic climate,” Dr Anthony said.
“There is a lot of money invested in long-term assets that will perform negatively if interest rates rise by up to 150 basis points because governments are issuing so much debt.
“That is particularly the case with international share portfolios that are exposed to high-growth assets.”
Your super fund can usually give you advice on the most suitable assets in which to invest.
The New Daily is owned by Industry Super Holdings