Weather the storm

A minus sign in front of investment returns may not be the only change superannuation fund members notice with their annual reports this year.

With super funds preparing to publish annual reports that will show losses for the first time since 2002, the Australian Securities and Investments Commission has expedited a cost-saving measure in return for which funds must include greater detail in their separately published member statements.

The regulator says provision of this extra information will be timely, given the likely slide in super fund returns and hopefully will prevent members making a knee-jerk decision to switch investment options or even funds.

ASIC says it will let super funds provide annual reports electronically as the default form of delivery - where members receive a printed copy only if they ask for one - as long as those funds add extra information about medium and long-term returns in their regular member statements.

Funds already have to report five-year performances in annual reports but ASIC says this information would be more usefully conveyed in member statements, where it's "more likely to be read".

It has indicated that it wants to see both five-year and 10-year measures in member statements, along with the usual annual performance and individual account balance.

Initially, that information may be provided in generic form - how typical investment options have played out over the years. Yet ASIC hopes that in subsequent years it could become "personalised", detailing how an individual member's investments have performed over five and 10 years.

This will be mandatory for funds that switch from paper to online annual reports but even funds that decide to stick with printed reports as their default option will be encouraged to provide the extra detail voluntarily. ASIC has issued a "regulatory guide" on information in periodic statements, setting out what it considers best practice.

The Association of Superannuation Funds of Australia welcomes the changes, saying they will improve communication with members, reduce the industry's carbon footprint and, according to its calculation, save the industry up to $88 million.

The association couldn't say to what extent those savings might filter down to members, however. Chief executive Pauline Vamos says it will differ from fund to fund and some may need to use at least part of the cost savings to improve their systems.

ASIC has been talking to funds about online delivery of annual reports for a couple of years and issued a consultation paper earlier this year.

The regulator says many super funds saw potential for substantial cost savings and were keen to make the switch as soon as possible. And with investment returns slumping, the regulator and funds are keen that members take a long-term view.

Even though its formal policy hasn't been finalised, ASIC has told funds it will turn a blind eye if they switch to default online delivery in coming months, as long as they meet those other conditions. They won't have to take the usual step of applying individually to make such a change because of this "no-action" approach.

The changes will eventually be formalised in "class order relief" setting out the rules for everyone.

"Nearly everyone who responded to our electronic disclosure consultation thought less paper in super was a good idea," says ASIC deputy chairman Jeremy Cooper. "[And] now that super returns are likely to be down this year on past years, we think it's a good time to roll this out."

The latest figures from the Australian Prudential Regulation Authority show the total return on assets in super funds was minus 7.7 per cent in the March quarter. Researcher SuperRatings estimates that super fund losses will be about 6 per cent over the year.

Super fund members who exercised investment choice and ticked the box on a more aggressive option, involving a high allocation to shares, face even bigger losses - more likely in the double digits.

"We think that many super funds will want to provide a longer-term picture of super returns to members who might not fully appreciate that super returns fluctuate over time and that even negative returns during some periods can be consistent with successful long-term investment," ASIC said in a statement accompanying its decision. "Not having this perspective might result in some fund members focusing on short-term results and, in a year of negative returns, potentially engaging in switching behaviour, to their ultimate detriment." (See also www.fido.gov.au/superreturns.)

Consultants Watson Wyatt last week ran some numbers on the scenario of a fund member switching investment options each time their chosen "balanced growth" option underperformed the more conservative option.

According to the super fund consultant, the typical balanced growth option has earned an average of 10.3 per cent a year over the past 20 years, compared with 8.7 per cent for a conservative or "capital stable" option. However, there were several years when the conservative option performed better than the growth option.

"During that period, if a member had switched their account balance to the better-performing option from the previous year, then they would have ended up switching 10 times and successfully wiped off about 0.7 per cent a year in performance, compared with just sticking with the growth option," says managing director Andrew Boal.

Over a lifetime of investing, say 40 years, clipping your returns by 0.7 per cent a year would reduce your final retirement lump sum by 15 per cent.

"For the average super fund member, that could mean their super savings run out three or four years earlier," Boal says.

Retail industry fund REST is Australia's largest super fund by members, with 1.7 million accounts, and many of its members are relatively young and new to super, so some will not have experienced anything other than a bull market (see returns left page).

REST won't be moving to a default electronic annual report this year but, regardless, will voluntarily add 10-year fund performance to the five-year measure it already provides.

"We've had five good years - years that we as funds and our members couldn't really have expected. If you look at it over six to 10 years you're getting a more realistic view of what expectations should be for long-term investing," says chief executive Damian Hill.

While he acknowledges that the cost savings from electronic delivery are likely to be significant for many funds, the sheer volume of reports and statements REST sends out means that it secures discounts that keep the unit cost of each report low. The annual report and member statement go out in one package in any case.

"But we are very supportive of the ASIC statement and, even though we don't see great cost savings, we do think it opens up the opportunity for more meaningful communication with members," Hill says.

REST members are already allowed to "opt in" to receive an electronic report but only 100,000 do so.