19 July 2008
Not so super
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The reality of what the global sharemarket downturn means to you and me is about to be spelled out in no uncertain terms.
Australia's 10 million-odd workers will soon start receiving their superannuation annual statements, documents that in recent years have trumpeted consistent double-digit returns.
Yet in the financial year just ended we should prepare ourselves for negative returns, in excess of minus 10 per cent in some cases.
But could this gloomy forecast have a silver lining?
After years of excess, a bad year like this could provoke us to better engage with our superannuation—thinking more about the returns we get, who's managing our money and, importantly, how much they're charging us for the privilege.
Transcript
This transcript was typed from a recording of the program. The ABC cannot guarantee its complete accuracy because of the possibility of mishearing and occasional difficulty in identifying speakers.
James Carleton: The reality of what the global sharemarket downturn means to you is really about to be spelled out in no uncertain terms, because Australia's workforce will soon start receiving annual superannuation statements in the mail. In the past it's been something to look forward to, hasn't it, with double-digit returns...we might have even been inclined to greet the postman with a small gift.
Not so this year. In fact the postie will, I'm sure, hope you're not home when he does his rounds this time because you've most likely lost money, in some cases in excess of 10% of what you had a year ago.
But if there is a silver lining to be seen in this cloud, perhaps it's that we may now be more inclined to engage with our super, and think a bit more carefully about our retirement plans. In particular we might ask, well, really those most basic of questions—still unasked in so many cases—who's managing my money? And how much am I charged for the privilege?
Well Jeff Bresnahan would certainly encourage us to ask and answer these questions. He's the managing director of Superratings, a firm that reviews the performance of retail and industry super funds. Good morning, Jeff.
Jeff Bresnahan: Good morning, James.
James Carleton: We have been inclined, haven't we, to not think about these things in the past, in the better times the markets have done well, but perhaps also because so many people find the topic, you know, boring and so impenetrably difficult.
Jeff Bresnahan: Yes, I agree with you. I think there would even be cases where people don't even bother to open the envelope, let alone read the contents. So I think this year will be a wake-up call for a lot of people. When you start seeing red ink splashed all around your statement and you start to see the fees that are still coming out of your fund, irrespective of the fact that they've lost money. So it is a wake-up call and it's a great opportunity to actually start delving a lot deeper into how you look at your super fund.
James Carleton: It certainly shouldn't be a reason to panic or do something rash.
Jeff Bresnahan: Absolutely not. The reality is most Australians have invested in what we call a balanced portfolio, so that's got about 70% in Australian and international shares, and a bit of property, and the rest of it in fixed interest and cash. Now four out of five Australians are in those sort of options and those options will return somewhere between 6% and 7% loss through the year. But we've got to put that in perspective, and the perspective is over the last five years, if you add up the returns, most Australians are still ahead by about 60% on their superannuation. So a good result, it's just the way it's occurred has been four very strong years and a negative year just looks bad on paper.
James Carleton: You say a balanced fund, a typical fund expects a 6% of 7% loss. Does that mean if you get 8% or 9%, think about moving funds, and if you get a loss of 1% or 2% or 3% stay where you are? Or it's not as simple as that?
Jeff Bresnahan: The range, James, will be somewhere—the best fund we've seen so far is about –1.7% and the worst is around about ̫14%. So the performance between funds does vary. The issue is, don't look at the one year returns in isolation. What you need to do on your annual report, which comes generally with your statement, they'll have a history of the last five years' performance. Now you need to try and benchmark that against the average performance in the industry, to see if that five-year performance has under-performed. If it has, then you've got a reason to move, because quite often a 12-months return won't tell the full picture, a 5- or a 7-year return does take the fund through various market cycles, and is a much better measure. But there are some serial under-performers in the superannuation market, and you need to find out who they are and if you're in one of their funds, look at moving.
James Carleton: That's underperformance in terms of both performance and fee structure?
Jeff Bresnahan: Normally just on the performance side of things. Fees are a completely different matter. If you can look at your fees before you join a fund, or if you're in a fund, they're quite clearly shown on your annual statement. Most people are unaware of it, but on that front page there'll be a dollar figure there. Now rule of thumb is that if you've got around about $100,000 in your super account, which would be lovely to have, you shouldn't be paying more than about 1% in total fees. So if on your annual statement you see for example fees of $2,200 and you've got $100,000 in there, that's a 2.2% expense, which is way, way too high. Now the fees can vary from something like 40 basis points, or .4 of 1%, right through to about 3% of your account balance every year. Now 3% is a lot of money, and you're basically paying over the odds for what you're getting.
James Carleton: Well what if it's an outstandingly managed fund and they charge accordingly, and that is offset by performance. These are complex calculations that the individual mightn't have the inclination or ability to make.
Jeff Bresnahan: Correct. And occasionally you do see that, where a fund that has charged a lot of money has performed very well, but it's not common. Basically there is no correlation between the fees charged and the performance of a fund. With the single exception occasionally of the fund actually paying what we call a performance fee to the investment managers, but basically just simply by looking at fees, a cheap fund is not necessarily going to perform badly, and quite the converse has actually happened. A lot of the industry funds which tend to be cheaper have out-performed over the last five or six years anyway.
James Carleton: We'll certainly get to that industry fund versus retail fund question shortly. But let me ask you about super choice, because we've had it now for two years, and it's really put the responsibility in the hands of the individual, hasn't it, whether we want it or not, as a lot of people haven't taken the opportunity of making the choice. How many actually have changed funds since super choice came in in July '06?
Jeff Bresnahan: Well it certainly came in with a bang, James, but unfortunately Australians haven't embraced it, and the evidence that we've seen would indicate that switching is less than 4% of the population per annum, and in most cases that switch simply occurs because people have changed jobs. So what that basically is telling us is that people are still extremely apathetic about their superannuation, and I think that the catalyst behind that was it's always been seen as a very complex area, particularly leading up to the tax changes of last year, and because of that, people steered clear of it.
People can understand an investment property, people can understand a direct share investment, but when it came to super and all the tax rules, that scared a lot of people away. Now with the tax rules the way they are in retirement, which is basically everything's tax free and income's tax free, it's not actually difficult to follow, it's pretty much like a bank account: money goes in, fees come out, insurance premiums come out, your earnings get credited, and there's you balance. And really, what we're encouraging people to do is to understand what is going in and out of your account each year, and to try to monitor that. In the same way that if your bank tripled its fees, would you stay with that bank? Probably not, you'd probably look around for alternatives. And so people need to take a little bit of ownership of their super and say, 'I need to understand what I'm paying to whom, and for what'. And once you've got that, and understand that and then are able to compare it to other funds, then you can start making some decisions. But really, it does come back to individuals to take some ownership of their super, and it's no good when you're 55, that's probably a little bit late. You should be doing this in your 30s and I understand 20-year-olds won't have a lot of money in there, but in your 30s you should start the planning cycle within your superannuation account.
James Carleton: But in your view, the fact that only 4% have made the choice to switch funds, that doesn't mean the policy has failed, you just think it needs more time for the benefits to come to fruition?
Jeff Bresnahan: Yes, I think it will ramp up over time, and what we've seen again is the engagement age appears to be coming down, so historically it might have been at 55, people suddenly woke up one day and said, 'Gee, I'd better check my super'. Now that seems to be down into the high 40s, so as people engage more, you'll find there'll be a higher level of switching between funds. The other thing we've got, and we've had for a long, long time, is we've had thousands of different super funds out there in the industry and APRA, which is one of the regulators of the industry, has put in place more stringent regulations which has culled the number of super funds, and I think that will continue to happen going forward, so it won't be as difficult to compare super funds going forward as it was historically, where you really didn't now what fund you were in.
James Carleton: Let's look at the industry fund versus retail fund debate. If I could get you to define the terms, if you will, and then give me your views on each.
Jeff Bresnahan: Yes, industry fund is a term that's thrown around a lot. I'd prefer to talk about not for profit, which they can come in several guises. The industry funds fall into the not for profit category, as do government funds and as do corporate funds. Now basically it's a simple discussion regarding funds that have been set up for a profit motive, so in other words the commercial funds, run by the larger life companies which have been around for a hundred years; and then you've got the industry funds, which were really born in the late '80s through the union movement, and again, you've also got the government funds and the corporate funds which may have been around for a long time as well.
Now it appears there is a marketing sort of war between these two entities, each sprouting what their benefits are. The reality is over the last five or six years, industry funds have traditionally been cheaper and that position still remains, albeit that it's closing slowly. We don't ever think that feewise they'll ever line up because of the profit need for the commercial funds.
James Carleton: And one might think, wrongly, that 'Well if they're not for profit they mightn't be attracting the kind of people to manage the money most effectively.' But tell me about the Motor Traders Association Industry Fund, that's an industry fund which has performed consistently well, it seems.
Jeff Bresnahan: Well it has. And there are reasons for that. The industry funds have tended to move into the unlisted assets space, and I'll explain that. Basically things like infrastructure and private equity, they moved into about five or six years ago, Motor Traders was the first fund to heavily move into what we call unlisted assets. So you'll find that they'll be part-owners of things like the M5 or a number of the airports around Australia. And by doing that, they've actually got the jump on a lot of their competitors and have gained significant returns out of a lot of these unlisted investments. Now funds have followed them in, but there's only a certain number of investments that are available; once an airport's been bought, there's not another airport next to it to buy again. So Motor Traders in particular, with the help of their asset consultant, I think it's Access Capital, moved quickly into the unlisted space, as I said, in the early 2000s, and have benefited significantly from there, and they have out-performed just about every fund over one, three, five, seven years. So that's how they got their benefit. The industry funds in general have also moved into that space, but not as heavily, whereas the commercial funds have tended to stay, what they call true to label, which means they're in the listed markets, they tend to be more in the listed property side of things, whereas the industry funds, or not for profit funds, tend to be more in the direct property side of things. So they do have different investment strategies, and that's why you've found this significant gap between performance between the two sectors.
James Carleton: And of course with the super choice now, you don't have to work in the motor trades industry to access the Motor Trades Association fund.
Look, Jeff Bresnahan, thank you very much for your time this morning, the managing director of Superratings, appreciate it.
Jeff Bresnahan: Pleasure, James.
Guests
Jeff Bresnahan
Managing Director, Superratings
Further Information
Story Researcher and Producer
Scott Wales
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