Super: the great Australian lottery

Before the government gives retail super funds equal billing in industry awards with industry funds, it should ask them why their customers get 25 per cent less in retirement.

Australia’s retail super funds are demanding equal billing with industry funds as default options in industry awards, which sounds fair enough, and the government is inclined to do it.

But before doing it the government should demand to know why they are giving their customers 25 per cent less in retirement than the industry funds, and what they are going to do about it.

That, by the way, is the end result of retail funds’ lower average long-term compound returns -- 5.8 per cent versus the industry funds’ 7 per cent

But super funds can't promise anything, they can only tell you what they’ve done in the past, and that is no guide at all to the future.

Choosing a bank is easy: they each promise to pay a certain interest on your savings and to charge you a certain rate on your loan, which means you can weigh up the various promises and pick one.

Super, on the other hand, is a lottery. You pick a fund, or have one chosen for you, and then 30 or 40 years later when you retire, you find out what you got. If you were lucky enough to pick a good one, you get cruises and restaurants; if you got a dud, then it’s sausages in front of the telly.

The only thing that matters with super is the long-term return; all the rest is marketing spin and irrelevance.

This week, super fund research house Chant West published the returns for 2014. The median ‘growth fund’ performance was 8.5 per cent; the top performer (the Queensland public servants’ fund, QSuper) made 12.7 per cent and the worst (unnamed) produced 6.5 per cent.

These numbers are both irrelevant and shocking. Can you, or should you now choose QSuper as your fund? Well, the longest performance data on its own website is five years -- over which period the fund got 8.7 per cent for the “balanced option”, whatever that means, and 10.04 per cent for ‘aggressive’. Not 12.7 per cent.

As the website notes “past performance is not a reliable indicator of future performance”, but that’s the only thing anyone has to go on.

Why are the numbers shocking? Well let’s apply them to someone who saves $500 a month for 35 years, from age 25 to 60 (that’s about 9 per cent of a $67,000 salary).

Using a long-term return of 6.5 per cent (the worst performer in 2014), which Chant West described as ‘respectable’, that sort of savings plan results in roughly $800,000. Using the 12.7 per cent that QSuper achieved last year, it results in $3.8 million.

That difference is mind-blowing. Of course, everyone will tell you that 12.7 per cent is impossible to get over 35 years, except that Warren Buffett has achieved a 21 per cent annual return over 50 years, and plenty of Australian fund managers have achieved at least 12.7 per cent and more over the long term.

By the way, that’s because they don’t employ ‘asset allocation’ -- they just invest in companies, which is what anyone investing for the very long term should do. The short-term volatility of share markets is irrelevant. (And by the way, if you gave Warren Buffett $500 a month over 35 years, you would end up with $41.7 million. Just sayin’.)

So what’s the median long-term return from all Australian super funds?

According to Chant West it’s 6.7 per cent for ‘growth funds’ (60-80 per cent invested in “growth assets”) over 15 years, which is the longest data available, and for ‘balanced funds’, it’s 5.9 per cent – worse than the worst performing fund in 2014.

The retirement sum for the 35 year/$500-per-month saver at the ‘balanced’ fund return of 5.9 per cent compound is a bit less than $700,000. This is an absolutely miserable result in my view, and doesn’t even get the retiree off the pension. The 6.7 per cent median growth option produces $839,000, only a little better.

Can you do better than 6-7 per cent compound return over the long term that Australian super funds, on average, provide? Warren Buffett did it.

Well, Australian Foundation Investment Co, one of the most conservative funds, has produced a 10-year compound return of 10 per cent. That would result in $1.9 million for someone who had used them exclusively for 35 years (assuming AFIC kept that 10 per cent going which, as we know, you can’t assume).

Let’s randomly pick another fund manager -- Hyperion Australian Growth Companies. Its PDS says the return since 2002 has been 12.2 per cent. That 12-year result would provide a retirement sum of $3.4 million if extended over 35 years for a $500/month saver.

As for industry funds versus retail funds, according to Chant West, industry funds have produced a compound annual return of 7 per cent over 15 years, while the performance of retail funds over that period has been 5.8 per cent.

Those returns, if extended for 35 years for our $500-per-month saver, would result in $900,000 and $680,000 in retirement respectively. That’s a $220,000, or roughly 25 per cent, difference.

For a start, when the retail fund sector demands equal billing in industry awards with industry funds, the government should be asking them why they are giving their customers 25 per cent less than the industry funds in retirement, and what are they going to do about it?

And secondly, if the government is going to provide more choice, what is it going to do to help people make that choice?

The one-year returns are irrelevant, and possibly misleading. The 15-year returns are more meaningful, but there is no easily available comparison of long-term super fund returns.

More likely, employers will choose for us. But the same problem arises -- on what basis do they choose?

How about this: if you want to keep your overdraft, you’ll choose the bank’s fund?

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