Experts analyse expected super earnings

Superannuation earnings over the past decade have generally been in double figures, but financial services consultant Rice Warner says we should prepare for earnings of three or four per cent over the next 10 years.

And it cautions that the impact of the early super release scheme will be significant.

Rice Warner says it’s time to be realistic.

“Over the next decade, the superannuation industry is not likely to have the same earnings pattern as enjoyed over the past 20 years,” it said.

“This will mean new targets,” the analysis said and questioned whether the standard of Consumer Price Index (CPI) plus 3 per cent to 4 per cent would remain viable over the next 10 years.

“Perhaps it will be if CPI is negative for some of this time,” it said.

“If targets are reduced, that will flow into communications material, online calculators and financial advice models. It will also reduce projected future retirement benefits for members and possibly reduce confidence in the system, despite its clear value for most Australians.”

Rice Warner said a move to force superannuation funds to hold more liquidity would also reduce their long-term earning capacity and eventually lead to lower tax revenue and higher Age Pension costs.

The impact of the unforeseeable early release scheme would be significant, it said.

“One of the implications of the scheme is that funds will hold more money in cash (earning very little). They will be worried that this precedent could be repeated, and they need to be better prepared.”

Rice Warner predicted that funds with a lot of members in hard-hit industries such hospitality might seek employees from different occupations.

“Most funds will manage, but some operate for members in industries with high levels of unemployment. 

“As JobKeeper does not allow for any superannuation contributions, the regular cash flow has been severely disrupted.”

International law firm Allens Linklater also sees “immense challenges” ahead for superannuation.

“Virtually all aspects of a superannuation fund’s operations will be impacted in some form or another,” a spokesperson said.

“It is already clear that the economic fallout from the pandemic is going to have a seismic impact on the way superannuation funds invest, at least in the short to medium term.”

It expects an increased need for liquidity driven by decreased contributions from members due to increased unemployment; increased outflows due to early release schemes; and members shifting into cash-based or more defensive options.

Allens Linklater predicts superannuation ‘spot fires’ to last for months, as occurred during the global financial crisis (GFC) of 2008 and 2009.

“It is clear that all asset classes are being impacted in unprecedented and sometimes unpredictable ways.”

But there is room for some optimism.

Allens Linklater says: “The silver lining is that this crisis, like that of the GFC, will pass and history shows that those investors who were on the front foot in managing their portfolios in that period … ultimately fared comparatively well out of their private market portfolios.”

Rice Warner finds hope in the fact that “no funds have gone to the Australian Prudential Regulation Authority (APRA) seeking approval to cease rollovers due to illiquidity.”

Liberal senator Andrew Bragg recently criticised superannuation funds for over-extending into illiquid assets, claiming the funds did not understand risk well enough and did not retain adequate cash.

But Media Super chief executive Graeme Russell struck back, saying the industry superannuation sector’s investment in unlisted assets, such as infrastructure and property, had delivered superior long-term returns.

Mr Russell conceded withdrawals via the early access scheme would have a significant impact, but the funds would not need to sell unlisted assets.

“There’s no question it will be a challenge,” he said. But he labelled Senator Bragg’s comments about infrastructure “politically motivated rubbish”.

Mr Russell said investment in unlisted assets was “one of the fundamental reasons” industry funds outperformed bank superannuation funds. 

Have you reeled in your projected earning from super over the next 10 years? Has that had a big impact on your retirement income?

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