How funds should be preparing members for lower returns

Rice Warner queries super funds’ strategies in ‘uncharted economic times’.

super fund returns

The official cash rate is at a record low of one per cent and expected to go to 0.5 per cent within six months. Wages growth is negligible and we have an ageing population with more people than ever reaching retirement age with a mortgage.

Rice Warner reports that young adults today will pay 12 times Average Weekly Ordinary Time Earnings (AWOTE) to buy a home, when their parents paid no more than three times. Baby boomers have ridden a wave of strong property and superannuation growth over the past 20 years, but what lies ahead and how can retirees – and super funds – best prepare?

Rice Warner says: “We live in very strange and uncharted economic times, and the future is increasingly murky. Yet superannuation funds, admittedly distracted by incessant loads of new legislation, don’t appear to have changed their outlook in communications with members.”

Should they be telling members that they are likely to average returns of five per cent over the next decade rather than the seven per cent they have become accustomed to? Rice Warner asks.

The research house questions whether good returns have made funds complacent, pointing out that broadcast outcomes have not changed much over the years, even though economic circumstances have been very different.

Surveys show that investment experts (and indirectly the superannuation funds) are sticking to conventional forecasts of future performance and are not building on the impact of the global economic crises.

This raises two issues, Rice Warner says.

“Should funds be telling members that they are likely to average returns of five per cent over the next decade, rather than the seven per cent to which members have become accustomed?

“Should the targets be reset lower in an environment of extremely high real asset prices and a decline in world growth (and future profitability)? Should we consider whether 10 years of ‘lower-for-longer’ has expanded to permanently lower interest rates, and a different normal state?”

Rice Warner notes that the members most affected are baby boomers.

“It has been of tremendous benefit to draw the minimum pension of five per cent up to age 75 when the fund was earning seven per cent.

“Many people in their mid 70s, who have been drawing the minimum, now have more money than they had at retirement.”

With that scenario unlikely to be the case for those retiring today, funds’ communications and retirement calculators should show the impact of the potentially worse outcomes.

More members will need to draw down their capital earlier, Rice Warner warns, and super funds should prepare members for much lower nominal returns in a low interest rate and inflation environment. Funds should also educate members to promote a tolerance for higher levels of volatility if they are to have a reasonable chance of achieving adequate long-term returns.

And how should members continue to gauge whether a fund is delivering good value?

Rice Warner says that fees can be opaque and past performance cannot be relied on to estimate future returns.

“So, the best that members can do is to look at the investment objective for the MySuper strategy. Many funds have a MySuper objective equal to an annual return of CPI + X per cent per annum over rolling 10 years. X is usually 3.5 per cent to four per cent.”

Are you concerned about your super fund’s earning capacity over the next 10 years? Are you drawing down on the capital? Are you prepared to tolerate more risk?

If you enjoy our content, don’t keep it to yourself. Share our free eNews with your friends and encourage them to sign up.

RELATED ARTICLES





    COMMENTS

    To make a comment, please register or login
    Farside
    24th Sep 2019
    7:10pm
    "investment experts (and indirectly the superannuation funds) are sticking to conventional forecasts of future performance" ... anyone who is not already skeptical of the dangers of the herd mentality should watch The Big Short and remind themselves how the "rock solid" US housing market collapse led to the bank bailouts and the GFC https://youtu.be/vgqG3ITMv1Q
    MICK
    25th Sep 2019
    3:38pm
    That's only the beginning Farside.
    Not only are markets volatile but we will soon embrace issues like the digitisation of 'money' and nobody knows exactly what that will do to wealth or returns on investments.
    Then there's the current buying of gold en mass. This is not a whim and the fact that governments and the wealthy are stocking huge amounts of the stuff tells me something big may be about to happen. I noticed last week that The Perth Mint has no 1 kg bars for sale. A worrying trend.
    I'm not in the know as a few others are but we are in times of tremendous change about to happen. When it does none of our lives will be the same as before.

    To the dinosaurs who have a grin ear to ear please think about things like the automobile and the desktop computer let alone Bitcoin. Who would have thought...
    The behaviour of governments and the rich should be the canary in the mine. Of course many will ignore the signs. They always do.
    Tricky
    25th Sep 2019
    10:52am
    Investment experts support pensioner and part pensioners in there request for a review of DEEMING RATES and fixed term cash deposits. That would be a start!
    Anonymous
    25th Sep 2019
    11:01am
    Hey Tricky fixed term deposits are set by Banks no one else so what ever rate they set that is it.
    Tricky
    25th Sep 2019
    11:06am
    As I understand the legislation , DEEMING RATES are set by the respective Government Minister.
    Anonymous
    25th Sep 2019
    11:11am
    Deeming rates are set on what people on welfare are actually earning from their investments not the cash rate. Having seen a lot of SMSFs earning in excess of 15% last financial year I doubt if deeming rates will be decreased any further.
    Anonymous
    25th Sep 2019
    3:33pm
    No pensioners on welfare in this nation - if I need welfare I usually head for the
    Salvos... they're nice people... they used to come collect our excess produce down on the farm for distribution to the poor - bloody socialists we all were.

    15% you say? Hmm .. investing with Mafia Fast Loans are they?

    I sincerely doubt many SMSFs are honestly earning 15% - many such are going down the gurgler - you must be living in some foreign land... but we all know by now what cunning investors some of you are ... or claim to be.... so cunning that not one of you is making a fortune selling your secrets and advice... funny that...

    (ROFL emoticon implied)... Jeez, Bear - you sound a lot like Old Geezer... now there was a first class dreamer....
    Farside
    25th Sep 2019
    4:12pm
    why do you find it so hard to imagine SMSFs earning 15% Trebor when 65 of the ASX200 shares are up by more than 15% in the past 12 months? I find it much easier to see how a small stock picker could do this while the large super and index funds are in the 7-10% range.
    Tricky
    25th Sep 2019
    11:03am
    Where is VCBB with his BS about high performing stock market and high returns. VCBB still hasn't nominated those high yielding shares that he or her procastrinates about.
    Anonymous
    25th Sep 2019
    11:13am
    Those high yielding shares are no good to you as they may not perform in the future. You have to work out what will perform in the future.
    Anonymous
    25th Sep 2019
    11:25am
    Tricky there are plenty of commercial property opportunities at good rates of loan interest or rental, there are syndicates that own say office buildings which you can buy units in generally secure and all paying from 7% or upwards one I recently saw a fund called Triology which has been paying nearly 8% for the last ten years these are what you have to get into if you don't like shares. Get on some investment sights on the internet and you will see these
    investments.
    Farside
    25th Sep 2019
    12:24pm
    Tricky is quick to label high returns as BS but there are plenty of folk doing well on leveraged investments and taking their opportunities in the market. A quick check of the ASX200 shows 65 shares that have returned better than 15% this past year. As Bear says you have to work out what will perform in the future. Timing is everything - buy low, sell high, know when to hold, know when to walk away and know when to run.
    https://www.marketindex.com.au/asx200

    If Tricky is only comfortable with cash investments then (s)he should seek out investment advice from a professional or trusted advisor rather than jump into the unknown based on something he or she saw on the internet and does not understand. There is plenty of BS in forums like HotCopper and the like that could rapidly become traps for the unwary.
    Anonymous
    25th Sep 2019
    3:34pm
    Just up above - he's seen 'em turning 15%!!!
    Anonymous
    25th Sep 2019
    3:35pm
    BTW - NOBODY 'works out what will pay in the future' - they guess and often make mistakes.... (repeat) NOBODY ...
    Anonymous
    25th Sep 2019
    3:35pm
    If it were that simple, everyone would be lined up from here to Patagonia getting in on it..... some MAY be lucky at times... but it's still a poker machine....
    Cautious
    25th Sep 2019
    11:22am
    I just realised what a low income I was on back in the day...
    I saved like crazy for our first house and borrowed to the max, even scared that I would never have money to improve or do a significant repair.
    The cost of the house was 5 times my annual gross earnings 34 years ago.
    Cautious
    25th Sep 2019
    11:25am
    Or is this an issue with statistics???
    Are all first starters well below average earnings?
    Farside
    25th Sep 2019
    12:30pm
    your observation is correct Cautious. And remember average earnings are about 50% higher than median earnings that better reflect what most people actually receive.

    "House prices took off in the mid 1990s. Average prices have increased from around two to three times average disposable incomes in the 1980s and early-1990s to about five times more recently. Median home prices have increased from four times median incomes in the early 1990s to more than seven times today. In Sydney, it’s more than eight times income."

    Read more at https://www.businessinsider.com.au/chart-australian-wages-house-prices-2018-3
    Jim
    25th Sep 2019
    2:54pm
    I was thinking the same regarding house costs and comparable wages, I bought my second house in 1971, the cost was $10,000, the house is 13 squares no garage, toilet in the bathroom, so by today’s standards my house is tiny, my wage at the time was about $2000 a year which increased to about $2500 a year if I worked overtime, I was working at Australian Iron and Steel Port Kembla, my working hours were 7 days a week on a shift rotation of night, afternoon and day shift, the hours per week were averaged out to 40 hours a week on a 4 week cycle, so on my math we were paying 5 times our annual salary, todays houses are probably 2/3 times the size of my place, so it’s stands to reason that house prices are going to be a lot higher. I don’t live in what would be described as a much sought after area, in fact the majority of homes close by are ex housing commission homes, not that there is anything wrong with that, but you are not paying top dollar.
    Anonymous
    25th Sep 2019
    3:37pm
    I bought my first rural acreage property for $42.5k - I was making about $15k pa from memory...
    Cautious
    25th Sep 2019
    7:54pm
    Things change don't they Jim yet they talk about avocados when we were lucky with a peach off a tree. Sounds like you did alright Trebor.
    The article makes a good point. Whats in the future for us? Interest rates look like staying down for a while. This should be sending investors elsewhere and pushing up other returns. Maybe money in ETF's would be a good bet if you have any money? But isn't that what the super funds are there to do? Then why the gloom on low returns? Maybe we should all be careful what we read and what we believe as sound.
    Franky
    25th Sep 2019
    11:46am
    After the GFC central banks started to print money. In 1997 after the Asian financial crisis the IMF came in and told countries they couldn't print money as it would lead to a debasement of their currencies. The West has been doing just that since the GFC and now we're at a point where our currencies are going down against Asian currencies and interest rates are in parts negative. We're stuffed in plain language. Chasing higher returns in the share market is risky as are unlisted bonds. What's left? I believe a reset of the monetary system is coming and Australia will not be on the winning side. Rather it's going to be those productive countries with responsible monetary policies and a good gold backing of their currencies.
    Rosret
    25th Sep 2019
    1:39pm
    Why not add to the trifecta. I am just back from doing the shopping and the prices have just done a quantum leap. The pensioners get a wage increase (that won't cover these prices) and the rest of us get negative pay. Yay!!
    Anonymous
    25th Sep 2019
    3:37pm
    Thanks for the warning... shopping tomorrow....

    25th Sep 2019
    3:27pm
    Funds' strategies? Why... to feed their advisors and functionaries as well as most such meaningless positions are fed these days - extraordinary well... and to ensure they are kept in clover for life...

    It's a culture absorbed from politics and business - a culture of absolute entitlement and turning a buck at any turn of the key ...
    Malbra
    25th Sep 2019
    10:18pm
    This is a great example of why you should not put all your eggs in one basket ( ie Super)
    Having 50% of your retirement assets in income producing property outside Super allows one to balance your income and hedge against the changes Governments introduce on Super and the unstable nature of the equities markets within Super.

    We need to educate the next generation that Super is only one vehicle to provide for your retirement
    Golden Oldie
    1st Oct 2019
    2:56pm
    12 years ago I went to a number of Financial advisors to find somewhere to rollover my super. The mantra was "not time in the market, not timing the market". Expected return was 8% to grow the funds for a specified time of about 10 years before it started to decrease. Ok. 12 years later you find that the expection is 6% pa, but the actual is less than 3% because the expenses of account keeping fees, and government charges, and fees, plus the drawdown of income to live on, to there is no increase to build up the capital. By the way, the less than 3% is not per annum, but actually the increase over 12 years, due to the GFC coming in about 12 months after retirement, and it has taken 10 years to get over that recession. Time in the market ?- what a laugh. 0.3% pa. Future performance? Anyone's guess.


    Join YOURLifeChoices, it’s free

    • Receive our daily enewsletter
    • Enter competitions
    • Comment on articles