Super fires up with equities

After plunging in the global financial crisis, strongly performing balanced funds are good news for fund members, writes John Collett. Playing politics How do the parties stack up when it comes to super policy? Money's John Collett investigates. Page 8

The superannuation system has come of age. It is now 21 years since the introduction of compulsory super and there is more than $1.6 trillion in retirement savings. Our superannuation system is the envy of much of the developed world, especially those countries with rapidly ageing populations.

While compulsory super started at just 3 per cent of salary in 1992, it is now 9.25 per cent and will gradually rise over the next several years to 12 per cent.

But it has not all been plain sailing. Fund members' faith in the super system was tested during the worst of the global financial crisis when account balances went backwards. It was a rocky ride for fund members and particularly for those not far from retirement. Some had to delay their retirement plans while others entered into retirement with a smaller nest egg than they were expecting. That is because "balanced" investment options, where most people have their super, have exposures to shares of at least 50 per cent, which is high by world standards.

Nevertheless, good returns on sharemarkets translate into good returns for the fund members. The typical balanced investment option returned 14.7 per cent for the year to June 30. That is the third-highest financial year return since the start of compulsory superannuation, behind only the 15.7 per cent returned in 2006/07 and the record 18 per cent returned in 1996/97. The very good return over 2012/13 has helped make the long-term returns look much more respectable than they did during the worst of the financial crisis. It has pushed balances to be 10 per cent higher than the pre-financial crisis peak. Researcher SuperRatings says $100,000 invested 10 years ago in the medium-performing balanced option would be worth almost $192,000 now. And that is just investment returns, it excludes the superannuation guarantee going into the accounts.

Jeff Bresnahan, the founder of SuperRatings, says despite all of the market turmoil, balanced options have delivered an average annual return of 7 per cent since the start of compulsory superannuation in 1992. That is more than 4 percentage points above inflation and above the investment objectives of most funds. "Despite the issues experienced in global markets over this time, such as the global financial crisis, funds have continued to deliver strong returns to members saving for their retirement," he says.

"Australians will no doubt be pleased when they open their annual member statements this year. Some four years after the lows of the GFC in February 2009, balanced options have now rebounded by 47 per cent."

Balanced returns

Australian and international shares, including listed property, have produced very strong returns over the year to June 30. Funds with a higher-than-average exposure to shares benefited particularly over the past year. Retail funds, those run by the banks and insurers, tend to have higher exposures to listed markets such as shares. Their not-for-profit rivals tend to have higher exposures to unlisted investments such as infrastructure, direct property and private equity. Strongly-performing sharemarkets over the year have resulted in more retail investment options in the table of top performers than in recent years.

Top spot for the year June 30 goes to StatewideSuper's Marketlink Growth Option with a return of 18.5 per cent. StatewideSuper is the fund covering local council employees, mostly in South Australia and also in the Northern Territory, but is open to the public. Industry fund REST's Core Strategy comes a close second with a return of 18.4 per cent with Aon MT Balanced Active, a retail fund, in third spot with a return of 17.9 per cent.

Con Michalakis, head of investments at StatewideSuper, says the fund has maintained a relatively high exposure to shares, of almost 60 per cent, throughout market cycles. Superannuation funds' performances must be judged over the long term. A fund's investment style can be favoured over short-time periods while producing poor returns over the long term. For the seven years to June 30, 2013, StatewideSuper's Marketlink Growth option produced an average annual return of 5.4 per cent. While that may not seem like much, it includes the worst of the financial crisis years. The investment option is the third best-performing balanced option over seven years. "We have good fund managers in equities and bonds and we have had strong performances from our infrastructure investments, which include Adelaide Airport and Flinders Ports," Michalakis says.

Industry fund CareSuper is another that has had a very good return over both the year and the long term. CareSuper's balanced investment option returned 16.2 per cent for the year to June 30, 2013. CareSuper's balanced option has placed fourth over each of three, five and seven years to June 30, 2013. The fund, while open to the public, has its origins in covering those working in administration and clerical jobs. About 60 per cent of its membership is female. Julie Lander, the chief executive officer at CareSuper, says many members of the fund take time out of the paid workforce to raise a family and do not want to see their account balance going backwards.

"CareSuper has focused on protecting the downside when markets are negative while trying to capture most of the up-markets," Lander says. The strategy means the fund is unlikely to be the No.1 performer in any 12-month period, but adds up to good performance over the long term, she says.

Telstra's Super Corp Plus - Balanced, the fund for Telstra employees, has returned 16.9 per cent over the year, to take fourth place. Over seven years, the fund has an average annual return of 4.8 per cent to be in eighth place. Employers have outsourced most of the small corporate funds. But corporate funds such as Telstra's show they can produce consistently good returns.

Other options

Super funds offer a range of investment options to members. These include diversified options that spread the money between investment classes and options that invest in a single asset class.

SuperRatings' data shows the median return on Australian share options was 21.1 per cent for the year to June 30. The average annual return over three years was 8.1 per cent. MLC Income Builder is the best-performing Australian share option over the year with a return of 28.6 per cent. Second spot is shared by Accountants Super Australian Shares and Perpetual Wealth Focus Perpetual Industrial Share Fund with a return of 27.4 per cent.

International shares returned 26.1 per cent for the year and an average annual return of 9.7 per cent over three years. BT Bus Super - BT Core Global Shares takes first spot with a return of 33.4 per cent over the year. Second place is shared by Colonial First State funds FirstChoice Wholesale Global Share and CFS Global Share with a return of 32.2 per cent. Among the diversified options, capital stable returned 8.3 per cent for the year and an average annual return of 6.4 per cent over three years. Conservative balanced options, returned 11.3 per cent over the year and 7.1 per cent in three years.

A system to be envied

Australia's super system is highly regarded elsewhere. In a survey released last year ranking various countries' retirement systems, Australia was found to have the world's third-best national retirement savings system behind Denmark and the Netherlands.

The study, by the Mercer consulting firm and the Australian Centre for Financial Services, weighed adequacy of benefits, breadth of coverage and other factors.

Though Australia's system has been praised, experts say it has one major flaw. It does not provide an annuity option for most retirees, meaning many run the risk of emptying out their retirement fund long before they die.



1992

The Labor government introduces 3 per cent compulsory superannuation contributions.

1995

Super coverage for women reaches 85 per cent, up from 25 per cent in 1983.

How super came of age

2000

Super savings reach $484 billion.

2002

Super able to be divided between the parties in a marriage breakdown.

2005

Most people can choose the fund to manage their super. Super savings reach $763 billion.

2006

Simplification of rules. Removal of compulsory cashing of super benefits for those aged over 65 and no exit tax on super withdrawn by those aged 60 and over.

2009

Super funds able to offer limited financial advice to their members.

2012

Super savings reach $1.6 trillion.

2013

Those aged 60 and over at July 1 have a contributions cap of $35,000 instead of $25,000 that applies to everybody else.

From July 1, 2014 the higher cap will be extended to those aged 50 or over on that date.

Under Labor's plan, the superannuation guarantee will rise to 12 per cent by 2019. If the Coalition wins government, it will rise to 12 per cent two years later.

Sources: Parliamentary Library, AMP, Fairfax Media, New York Times.