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Superannuation

Is your super working for you?

23 July 2018

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Chances are your super savings could make a big difference to how youll be living in retirement. So its important to understand exactly what youre looking at when it comes to comparing different funds and investment options.

A recent report into the super industry by the Productivity Commission has raised the alarm for many Australians and their retirement savings. According to the Commissions findings, some account holders may be losing out on investment earnings if their fund’s default option is underperforming. Although this isn’t good news for the super industry and some members, it’s a reminder of how important it is to take an active interest in which fund you’re with and how your super is invested within that fund.

CERTIFIED FINANCIAL PLANNER® professional Lisa Palmer is Head of Financial Planning at Statewide Super in Adelaide. As someone who advises many people on investing their super, Lisa is very aware of how much impact these choices can have. “As compulsory contributions under the super guarantee (SG) are likely to increase to 12% by 2025, the earlier you understand how and where your money is, the better off you will be,” she says. “Having the ability to choose your own super fund or create a self-managed super fund – as most Australians can – can cause confusion and inaction. There are some key aspects of a fund that you need to understand, and these can influence how much you will have at retirement.”

Default options

When you join a new super fund, your contributions and any balance you transfer from other accounts, will be invested in a default investment option, unless you step in and make a choice. This default is generally the fund’s balanced option, which will also be their MySuper account[1]. MySuper was introduced to provide cost-effective and simple products for employers and employees to choose from. But some MySuper products came under fire from the Productivity Commission, which found that 1.7 million accounts worth $62 billion are in MySuper products which display “serial underperformance”.

On the other hand, having a super invested in a balanced fund may not be such a bad thing. According to performance figures from Super Ratings, balanced funds were expected to return an average of 10.5% for the 2017 calendar year[2]. However, this figure is based on the performance of balanced funds with exposure to growth style assets of between 60% and 76%. This highlights the fact that not all balanced funds have the same composition when it comes to their investment mix.

“The trouble is there is no uniformity on what a balanced fund is invested in and they can vary wildly,” says Lisa. “This makes it difficult to compare one super fund to the next. When most people think of a balanced option they assume half the funds are invested in growth assets and the other half in defensive assets, but this is not always the case.”

The table below illustrates examples of two different balanced funds. “These funds are invested very differently, yet they have the same ‘balanced fund’ tag,” says Lisa. “It is likely that Fund A will outperform in positive markets and be the fund of choice (in comparison to Fund B). But it may not be well understood that it carries extra risks in the portfolio and is likely to be more volatile.”

 

Asset Class Fund A Fund B
Australian Shares 25% 27%
International Shares 34% 23%
Property 7% 10%
Infrastructure 13% 5%
Alternatives 2%
Private Equity 3%
Growth Assets 82% 70%
Credit/Defensive Alternatives 6% 5%
Fixed Interest 2% 20%
Cash 10% 5%
Defensive Assets 18% 30%
Average return over 3 years to 30 June 17 9.23% 8.83%

 

Alternatives to consider

For many funds, balanced is just one of the pre-mixed investment options you can choose from, such as Growth, Conservative and Cash. Each of these are designed to offer different levels of risk and return, but as with the balanced example Lisa provides, each fund is likely to have their own way of spreading your super across different assets. So when it comes to weighing up funds and their options, you need to dig a little deeper to see if you’re really comparing apples with apples.

If you’re confident in taking a more active approach to managing how your money is invested in super, some funds will also allow you to choose your own weightings to different types of assets. Some of the options for this approach might include direct investment in Australian or international shares, indexed or managed funds or fixed interest products like term deposits.

The fee factor

As well as the risk and return expected from different investment options, you should also be aware of the fees associated with making a change to your super. The cost of investing your money in a certain way can be higher and this can be reflected in the fees you’ll pay for investment options. You’ll also be paying other types of fees on your super account, including administrative fees for the cost of running the fund and holding your account. “It can be easier to look at your fund’s Product Disclosure Statement to better understand these charges, especially when comparing two different funds,” says Lisa.

Whatever your plans are for retirement, a CERTIFIED FINANCIAL PLANNER® professional can offer valuable advice on making sure you have enough income and super to live comfortably and achieve your goals.

AFSL for Statewide Super is 243171

[1]MoneySmart, Super Investment Option, “Most funds have a ‘default’ investment option. This is usually a balanced investment option that has a mix of defensive and growth assets. A fund’s default investment option is also its MySuper option.” https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-investment-options

[2]Super Ratings Media Release, 1 January 2018, “According to SuperRatings, the SR Balanced (60-76) Index, used to measure balanced super fund returns, is estimated to rise 0.6% in December, bringing the annual return for 2017 to 10.5%”https://www.superratings.com.au/wp-content/uploads/2018/02/Media-release-Santa-rally-delivers-10.5-return-for-super-funds-in-2017.pdf