Insight

Whenever sharemarkets nosedive, the superannuation industry comes out with a familiar refrain.

By InvestSMART · 15 Aug 2012

By InvestSMART ·
15 Aug 2012

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Whenever sharemarkets nosedive, the superannuation industry comes out with a familiar refrain.

"Remain calm," we're told. "Try to avoid being swept up in the breathless media reporting, and remember: super is a long-term investment."

This is all very well, but not foolproof. As the economist John Maynard Keynes observed: "In the long run, we are all dead."

More seriously, the past few years have been very poor for super funds, even if we ignore month-to-month changes.

Over the past five years, for instance, balanced funds in which most people have their savings have lost 0.2 per cent. For growth funds, which favour riskier assets, the performance has been even more dismal, with a 1.74 per cent fall. Only the ultra-conservative cash funds have posted solid returns.

A five-year losing streak may not matter too much to someone in their 20s, with four decades of work ahead of them. But it matters a lot if you're approaching retirement.

So how is this run of weakness affecting people's decisions about their super? Has there been a big switch towards more conservative funds?

There are certainly signs the public is increasingly lukewarm towards traditional super funds.

Most obviously, many people have stopped putting in extra contributions, on top of the sums employers must put in on workers' behalf.

Voluntary contributions have fallen in most quarters over the past four years. Investors chose to put $600 million less into their super in the March quarter compared with a year earlier, the Financial Services Council says.

Aside from contributing less, some have also moved their savings into more conservative types of accounts. Most strikingly, the share of super fund investors to choose a "balanced" fund has slumped from 72.6 per cent in 2008 to 65.6 per cent today, SuperRatings says.

At the same time, the share of people putting their super into "cash" has almost doubled (albeit from a low base) from 2 per cent to 3.9 per cent.

Overall, these are fairly modest trends, and it seems most are hanging in there with traditional types of super accounts. But if returns don't improve, the slow drift away from classic super funds is likely to continue.

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Frequently Asked Questions about this Article…

How have Australian superannuation funds performed over the past five years?

Over the past five years the article reports weak returns: balanced super funds (where most people have their savings) have lost about 0.2%, growth funds (which favour riskier assets) have fallen around 1.74%, while ultra‑conservative cash funds have posted the strongest returns.

Are investors moving from balanced to more conservative super funds?

Yes — the share of investors choosing balanced funds has fallen from 72.6% in 2008 to 65.6% today, and the proportion in cash funds has nearly doubled (from about 2% to 3.9%), indicating a modest shift toward more conservative options.

Have voluntary super contributions changed because of weak returns?

The article says voluntary contributions have fallen in most quarters over the past four years. In the March quarter investors put about $600 million less into super compared with the same quarter a year earlier, according to the Financial Services Council.

Who is most affected by a five‑year run of weak super returns?

People approaching retirement are most affected: a five‑year losing streak matters a lot for those close to drawing their savings, whereas younger workers with decades until retirement are less immediately impacted.

Should I ‘remain calm’ and treat super as a long‑term investment during market dips?

The super industry’s usual advice is to remain calm and remember super is a long‑term investment. The article notes that’s sound for many investors, but also cautions it isn’t foolproof—especially for those near retirement who can’t rely on long horizons to recover losses.

Is the overall shift away from traditional super funds large or modest?

The article describes the changes as fairly modest so far: most people are still in traditional types of super accounts, but the slow drift away from classic super funds is likely to continue if returns don’t improve.

What specific actions are everyday investors taking in response to poor super performance?

According to the article, some investors have stopped making extra voluntary contributions and others have moved savings into more conservative accounts (for example, switching from balanced to cash options).

How much has the share of superannuation investors in cash funds increased?

The article reports the share in cash funds has almost doubled from about 2% to 3.9% — an increase from a low base but still a relatively small share overall.