SUPER fund members are bearing the brunt of Australian fund managers' tendency to invest too heavily in shares, former Treasury secretary Ken Henry says.
With super funds posting losses in two of the past four years, Dr Henry made the case for directing more of the nation's $1.3 trillion super pool into conservative assets.
Australian super funds, which typically hold about 70 per cent of their portfolios in "growth" assets such as shares, tend to be higher-risk than pension funds overseas.
In most countries, pension funds hold more than half their portfolios in conservative assets such as bonds. Fund managers defend the high exposure to shares by saying that, on average, shares perform better than fixed-interest assets over several decades.
But Dr Henry said a strong "average" performance of shares over time had not prevented many fund members from losing out when markets tanked. "Depending upon when they enter the system and when they retire, some fund members will benefit enormously from a portfolio weighted heavily toward equities, while others will lose big-time," Dr Henry said at a conference in Sydney yesterday.
"And nobody knows, in advance, who will win and who will lose."
As an "extreme" example, Dr Henry said, someone who was 59 in 2007 and planning to retire at 60 would have lost almost half their super wealth in their retirement year if they were in an aggressive super fund. After retirement, there was also a "clear" case for greater use of fixed-income products and, in some cases, annuity insurance that provided people with a guaranteed pension for the rest of their life.
His comments come after many fund members have shifted to lower-risk funds in response to poor returns and volatility.
The managing director of SuperRatings, Jeff Bresnahan, said that as many as 20 per cent of members had moved to safer options in recent years, but equity still provided the best long-term return.
Besides exposing investors to greater volatility, Dr Henry said the fixation with shares had left Australian banks dependent on wholesale debt markets for funding.
"If only for purposes of macroeconomic insurance, I would argue that it is strongly in our interests to find ways of reducing the banks' reliance on offshore debt finance," Dr Henry said.
To tackle the problem, he said, he had tried to convince super funds to invest more heavily in bank debt at the height of the global financial crisis. But he said the efforts failed because of fund managers' belief that equity performed better than debt.
"I wasn't convinced then, and I'm even less convinced today," he said. "We should be thinking much more seriously about what sort of asset portfolio really is in the best interests of our superannuation fund members, especially as they move into retirement."