Super funds hunt income for retirees as rates fall

Super funds posted modest gains in September after falls in August, but are facing challenges in delivering income to those in the retirement phase.

Superannuation research house SuperRatings reports that the median balanced option returned 0.5 per cent in September. The median growth option fared slightly better, returning an estimated 0.7 per cent, while the capital stable option was flat.

Over the calendar year to date, the median balanced option return hit 11.5 per cent and over the past five years, an estimated 7.7 per cent per annum compared to 8.3 per cent per annum for growth and 4.8 per cent per annum for capital stable. 

SuperRatings says pension returns also saw promising growth in September, with the balanced option returning an estimated 0.6 per cent over the month, compared to 0.7 per cent for the median growth option. The median capital stable option was flat.

SuperRatings noted that while pension returns had held up well, the low rate environment was making it challenging for funds to deliver income to those in retirement.

The Reserve Bank’s interest rate cut last week took the cash rate to a record low of 0.75 per cent and pulled longer-term rates down with it. Falling rates have resulted in capital gains in bond markets since the start of 2019, but the downside was the challenge the low rate environment presented to retirees in need of income.

SuperRatings executive director Kirby Rappell said that with interest rates so low, the hunt for yield was intensifying and likely to become more of a challenge for super funds.

“Pension returns are holding up well, but the split between capital gains and income is critical for retirees, because they rely on income streams to fund activities in retirement,” he said.

“Over the past few years, we’ve seen super funds steadily reduce their allocation to bonds in favour of other income-generating assets like alternatives and property in order to generate their required yield.

“We expect this theme to continue to play out as rates remain low and possibly move lower over the next year or two.”

SuperRatings says the key theme throughout 2019 has been the steady fall in yields as economic uncertainty sees investors move into bonds and other safe assets. In Australia, the yield on 10-year government bonds ended September at one per cent, down from 2.3 per cent at the start of the year.

Yields have been on the decline since the Global Financial Crisis (GFC), with the 10-year yield falling from a high of 6.5 per cent just before the market meltdown.

Over the past 15 years to September 2019, an estimated growth rate of 6.9 per cent was observed for the SR50 (60-76 per cent) Balanced Index, which is well ahead of the return objective of inflation plus three per cent. Over this period, a starting balance of $100,000 in the median balanced option would have grown to about $271,000.


“Long-term super returns are healthy, even when you include the GFC period,” said Mr Rappell. “However, there’s no doubt that super funds are finding it harder to identify opportunities in the current environment.

“With valuations stretched, funds are paying more for growth, while lower interest rates mean they need to look beyond traditional assets to generate income.”

Are you worried about your super fund’s returns in the current economic environment?

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