Check how sums are done
There's no one method for calculating how investment returns are added to your super balance.
There's no one method for calculating how investment returns are added to your super balance. It's this time of year, as people study their superannuation fund statements, that complaints flow about the difference between what they thought their balance would look like and what's actually there.Often the difference can be sheeted home to the ups and downs of markets and asset valuations. But sometimes even that doesn't explain the gap.One tripping point may be the focus on the average investment performance of super funds. According to researcher SuperRatings, the median balanced option delivered a positive return of 0.4 per cent in 2011-12.But, being a median, just as many funds would have fallen short of this return as would have exceeded it. Many would have been in negative territory.And what does "return" mean, anyway? What's the difference between investment return, earnings rate and crediting rate?Let's sort out the terminology.The Actuaries Institute recently expressed concern about potential confusion for consumers and issued a "best practice" note to its members, who are employed by funds to calculate investment returns and crediting rates.Crediting rates often do not equal investment returns, it says. That's because crediting rates are investment returns minus investment taxes, fees and costs.In some cases, administration and advice fees may also have been deducted to come to the credit rate, or money reserved in case of higher-than-expected operational expenses or to smooth investment returns over time.Colin Grenfell, a superannuation actuary, consultant and trustee director, says that, unfortunately, this means sometimes people aren't comparing apples with apples when they compare one fund's investment return with another's crediting rate, or even when they compare crediting rate to crediting rate (because each fund has its own policy on what costs come out).Earnings rate is another term you'll see. This falls somewhere in the middle.According to SelectingSuper, it's the rate earned by your super fund after fund manager fees are deducted (but before all those other costs reduce it down to the crediting rate).And while industry funds tend to use the term crediting rate, retail funds use daily unit pricing.The law doesn't stipulate a particular method for determining what happens to your balance but says only that the investment return credited or debited must be calculated in a way that's fair and reasonable, with regard to factors such as the profile of a fund's members.Pricing methods vary from fund to fund, "depending on the fund's needs - its membership demographics, size and offering of investment options," the chief executive of the Australian Institute of Superannuation Trustees, Fiona Reynolds, says.So even within the universe of funds using crediting rates, the calculation method is far from uniform.Some funds calculate crediting rates daily, others weekly, fortnightly or monthly. Some may have an annual crediting rate.Some use multi-year formulas, averaging returns over two or three or four years to come up with the crediting rate.If the crediting rate your industry fund declares doesn't tally with what you've seen happening in the markets recently, it may be because your fund is one that applies a multi-year formula."You can see where the difference is - while this year may be a good year, if the previous years weren't so good you may end up with a crediting rate that's lower than the [annual] investment return," John Dani, national manager, advice development, for ipac securities, says.The theory is that while there may be grumbles in a positive year the benefit of forgoing some of the upside in a good year is that fund members can be shielded from the worst of a down year.You can find out how your fund sets its crediting rate by going to its website, checking its annual report or calling its customer service line.Key points Investment return and crediting rate are not the same things. The crediting rate is after taxes, fees and costs. Each fund has its own way of calculating crediting rates. Be careful to compare like with likeIts all in the timingIf you're about to retire, is it possible to time the withdrawal of your super to take advantage of a fund's schedule for setting crediting rates?If your fund calculates its crediting rate less frequently than daily but more often than annually, that might be possible, one industry source says.If your fund strikes a crediting rate that it maintains for, say, the next month, in a falling market you might gain an advantage by withdrawing before the next rate is struck locking in the benefit of a higher market, despite falls in the meantime, the source says.Conversely, if the market is rising, you might want to hold on for a new, better crediting rate.There's an important caveat. You need to know your fund's "business rules" on payouts.The rules might say that withdrawal requests will be fulfilled five working days after being lodged, in which case you would need to be at least five working days clear of the next crediting rate being struck if you wanted the current one to apply.
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