Super returns gain on sharemarket but SuperRatings warns inflation makes targets tough

Retirees can breathe a sigh of relief that super fund returns are back in the positive after some bumpy months at the start of this financial year.

Inflation remains one of the biggest challenges for super funds.

Superannuation investors may breathe a sigh of relief after funds produced positive returns in April, of an estimated 1.2 per cent for a median balanced option, taking the financial year to date earnings to 8.1 per cent, according to ratings company Lonsec.

It’s a big improvement from last year when super funds were only up 1 per cent year-to-date and ended the year at -3.5 per cent, said Kirby Rappell, Executive Director of Lonsec’s SuperRatings unit.

“So far this year the story has been strong rises in Australia and international shares,” said Mr Rappell.

The returns “will be welcome news for members after last year’s losses as well as some bumpy months at the start of this financial year,” he said.

An estimated 8.1 per cent return is still below the targeted rate by most super funds, of inflation plus 3 per cent though. Australia’s inflation rate is currently 7 per cent.

“It illustrates the challenges that super funds face over the next few years,” Mr Rappell said. “What it reinforces is that super remains a long term game and that returns are holding up pretty well, despite the challenges that funds and their members are facing to adapt to a higher inflation environment.”

Since superannuation was introduced in 1992, funds have produced positive returns 31 times and negative returns only five times, including last year.

Mr Rappell said that many funds had now built up high cash allocations that they would either be readying to deploy, or keeping in reserve as the rates of retirees increase and more funds are paid out.

According to the latest data on retirement intentions from the Australian Bureau of Statistics, reported in 2020, more than half a million people intended to retire within five years.

At that point in time, there was 3.9 million retirees and the pension was the main source of income.

Inflation remains one of the biggest challenges for super funds, with the Reserve Bank of Australia raising rates again earlier this month by another 25 basis points to 3.85 per cent.

Private assets of super funds were also called out by Mr Rappell, who said that although investments in the likes of airports, ports and commercial properties had helped build wealth among super funds, there is “uncertainty about valuations” of some of these assets now.

Still, he said that super funds had increased the frequency at which they valued them.

“We expect to see continuing volatility in returns, despite the strength with which volatility has been navigated to date,” Mr Rappell said. “While fund performance may struggle to significantly outpace inflation in the current environment, over the long term they continue to perform well.”

According to SuperRatings estimates, the median growth option rose 1.4 per cent over April, and the median capital stable option rose by an estimated 0.7 per cent.

Pension returns also rose in April, with the median balanced pension increasing 1.3 per cent and median growth pension increasing 1.6 per cent. The median capital stable pension increased 0.7 per cent in April.