After experiencing big losses, superannuation balances are climbing out of the GFC doldrums.
Superannuation account balances have almost clawed back their losses from the global financial crisis. It has taken five years, but after the worst returns on investment markets for many decades, account balances are within sight of their all-time high in October 2007.
It marks a turning point but one that will provide little comfort for those close to retirement whose plans for a comfortable lifestyle have been dashed.
As the SuperRatings graph shows, the median-performing balanced investment option with $100,000 in March 2002, would have peaked in October 2007 with $167,000, and then hit a low of $126,000 in February 2009. The balance is now just a tad under $164,000 (calculations assume no contributions were made).
It is important to remember that this is the performance of the median-performing balanced option (where most people have their savings) and that there are big differences in the best- and worst-performing funds.
Those close to retirement will have little alternative but to rebuild their account balances by making voluntary contributions up to the $25,000 a year cap, as well as perhaps working longer than planned.
The returns of "balanced" options are particularly volatile because they perform in line with sharemarkets.
The typical balanced option has 30 per cent of their money in Australian shares and 20 per cent in international shares.
Long-term performance data normally shows shares doing well for several years followed by a year or two of falls, but the GFC derailed that pattern. Nevertheless, super funds are sticking with their big allocations to shares, maintaining their faith that shares will produce the best returns over the long term.
They view the GFC as an unusual event that is unlikely to reoccur for a long time, perhaps decades.
The research manager at SuperRatings', Kirby Rappell, points out that fund members are free to choose from a selection of investment options within their fund and do not have to stay in a balanced or "default" option because that's where they have always been. The better-performing options over the past five years have been those, such as capital stable, with higher exposures to income-producing investments such as fixed-interest and cash (see page 9).
But with shares looking as if they are embarking on a sustained recovery, now may be the worst time to switch to a more conservative option.
Rappell says more people exercise investment choice in the pension phase than in the accumulation phase. But it is still low. SuperRatings' data shows about 41 per cent of those in the pension phase are in their funds' balanced option - with its high exposures to shares - with a further 18 per cent in higher-risk options such as global shares and property.
Fund members face many years in retirement and retirees do need some exposure to growth assets, such as shares and property, to help keep pace with rising prices, he says.
However, the more aggressive investment options stand a greater chance of making losses at a time when retirees are drawing down on their capital meaning losses are realised rather than "on paper" (see also page 12).
Which asset allocation is best depends on many variables, including the members' overall financial situation and tolerance for risk. This is where professional financial advice is particularly valuable, Rappell says.