Super industry 'overexposed' to volatile assets - Mercer

THE $1.4 trillion superannuation sector faces renewed criticism for its heavy exposure to risky assets such as shares and property, with a new report calling for an overhaul of investment strategies.

By InvestSMART · 16 Oct 2012

By InvestSMART ·
16 Oct 2012

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THE $1.4 trillion superannuation sector faces renewed criticism for its heavy exposure to risky assets such as shares and property, with a new report calling for an overhaul of investment strategies.

Australian super funds have the highest share of holdings invested in growth assets in the world, rankings published by Mercer yesterday show.

With the typical super fund holding more than 70 per cent of its assets in growth assets, the report marks Australia's system for its "high level of exposure to volatile assets", which it says leaves investors bearing too much risk.

The dangers are heightened in Australia's compulsory super system because it is a defined contribution scheme, the report says. A larger weighting towards safer assets such as bonds and fixed interest is likely to provide "a better long-term outcome for members."

Despite the criticism, Australia's super system is ranked the third best in the world in Mercer's latest index of global pension funds, up from fourth place last year. This rise was mainly due to better conditions in sharemarkets.

The managing director of SuperRatings, Jeff Bresnahan, defended the heavy investment in growth assets, and said it was up to members to change the weighting of their plan if they wished.

"Yes [they're] volatile, but they also provide long-term benefits, which are going to provide higher retiree benefit for those in the system," he said.

The report's author, David Knox, said the findings were a reminder to fund trustees to take a broader view to ensure their asset allocation strategies suited all members, especially those nearing retirement.

"We think that some countries that are only invested in fixed interest or bonds probably aren't giving their members the best deal. But we think Australia needs to ease off a little bit," Dr Knox said.

"Because Australia has more investment in growth assets like equities, property and infrastructure than other countries, then the system is a little bit more volatile," he said.

The report gave the best scores to countries with between 40 per cent and 60 per cent of their pension savings in growth assets.

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Frequently Asked Questions about this Article…

What did Mercer’s report say about Australian super funds’ exposure to growth assets?

Mercer’s report found Australia’s $1.4 trillion superannuation sector has the highest share of holdings invested in growth assets in the world, with the typical super fund holding more than 70% of its assets in growth assets such as shares and property.

Why is heavy exposure to volatile assets a concern for superannuation members?

The report says heavy exposure to volatile assets leaves investors bearing too much risk, and that danger is heightened in Australia’s compulsory defined contribution system because individual balances can be more directly impacted by market swings.

What counts as ‘growth assets’ in superannuation portfolios?

In the report, growth assets include equities (shares), property and infrastructure — essentially assets expected to grow value over time but that can be more volatile in the short term.

Would increasing bonds and fixed interest in my super improve long‑term outcomes?

Mercer’s report suggests a larger weighting towards safer assets such as bonds and fixed interest is likely to provide a better long‑term outcome for members, because these assets can reduce volatility compared with a heavy allocation to growth assets.

How did Mercer rank Australia’s super system globally and why did it change?

Mercer ranked Australia’s super system third best in the world, up from fourth last year — a rise the report attributes mainly to better conditions in sharemarkets.

What do industry representatives say about keeping a high allocation to growth assets?

Jeff Bresnahan, managing director of SuperRatings, defended the heavy investment in growth assets, noting they are volatile but provide long‑term benefits and higher retiree outcomes; he also said members can change the weighting of their plan if they wish.

What should fund trustees consider when setting asset allocation strategies?

Report author David Knox said trustees should take a broader view to ensure asset allocation strategies suit all members — especially those nearing retirement — and suggested Australia could ‘ease off a little bit’ on growth asset exposure.

If I’m worried about risk in my super, what can I do according to the article?

The article notes it’s up to members to change the weighting of their plan if they want less exposure to volatile growth assets; it also highlights calls for trustees to design allocations that better suit members, particularly those close to retirement.