A negative yearly return for super

For only the fifth time since the super guarantee was introduced 30 years ago, workers are facing negative annual returns on their retirement savings.

Workers are facing negative returns on their retirement savings this year, following a dismal performance in June. Picture: iStock

For only the fifth time since the super guarantee was introduced 30 years ago, workers are facing negative annual returns on their retirement savings.

And unlike two years ago, when Covid pushed funds only slightly into negative territory, this time we’re looking at returns of about -5 per cent or more, with most of the hit taken in the past month alone.

Prior to June, super funds were only slightly in the red for the ­financial year, down 0.3 per cent to the end of May. But the dismal performance across listed equities in recent weeks has deepened the losses. The impact on unlisted ­assets is the big unknown at this stage.

Despite the short-term setback, the average annualised return for balanced funds since the super guarantee was established in 1992 sits at about 7 per cent, with the typical fund exceeding its long-term return objective of CPI plus 3 per cent.

But how does this compare with single asset classes?

If you had put the same retirement savings into the Australian sharemarket over the same period, reinvesting the dividends, you would have fared better – while stomaching greater volatility too.

The average annualised return for the All Ordinaries accumulation index over the past three decades is about 9.5 per cent. Likewise, with international shares, you would have seen an average annual return of about 8 per cent over the years since 1992.

An investment in Australian bonds, meanwhile, would have delivered an average yearly return of 6 per cent, compared with listed property at 8 per cent, and cash at an average 4.4 per cent annual return over the 30 years.

While growth assets such as equities typically make up about 70 per cent or so of balanced super funds, defensives such as cash and fixed interest, as well as infrastructure, make up the remaining 30 per cent, helping to smooth out the journey.

The default investment options that most super members find themselves in – balanced funds – has delivered a good outcome over the years, Steve Mickenbecker of Canstar research group says.

The overall sharemarket performance tells a story of long-term growth punctuated by periods of correction, disruption or crisis, he notes.

“With the benefit of hindsight, markets have always recovered those losses, but at the time it never felt comfortable,” he says.

“The performance of some of our leading super funds’ balanced options also shows the benefit of the long-term return in share­markets, the Australian market in particular.”

Australian Super has returned 9.7 per cent per year since 1985, while Aware Super and QSuper have each returned 6.8 per cent a year, respectively, since the mid to late 1990s, according to data compiled by Canstar for The Weekend Australian.

“Comparing performance statistics can be tricky with different start points, in particular when big market corrections straddled those points. But when looking out 25-35 years, you expect to see history acting as the great equaliser,” Mickenbecker says.

The big unknown, of course, is where to from here.

After 30 years of growth, the pressure is now on super funds to meet members’ higher expectations, SuperRatings executive ­director Kirby Rappell says.

“The growth in super balances would likely have met or exceeded workers’ expectations over the last 30 years, with the average ­account balance now sitting at over $100,000,” Rappell says.

“But this presents a challenge for funds. A 5 per cent decline on a $100,000 balance will be felt much more than a 5 per cent fall on, say, a $40,000 balance, which was the average at the time of the Global Financial Crisis. “We’ve also become accustomed to strong performance over time, especially over the past 15 years.”

The dismal performance across listed equities in recent weeks has deepened the losses. Picture NCA Newswire/ Gaye Gerard.

For Mark Delaney, chief investment officer of the nation’s largest super fund, the $250bn AustralianSuper, the coming years will be dominated by lower returns and a much more challenging investing environment.

“Over the last 30 years we’ve had phenomenal investment returns. And that’s provided legitimisation for the super system, because people have seen their balances and their savings grow dramatically,” Delaney says.

“But we’re now at an inflection point around inflation, geopolitics and globalisation.

“And that’s going to make the investment environment less ­attractive for the next 15 years compared to the past 15.”

The energy transition, global conflicts and a push to “redistribute gains away from capital toward average Australians” will help to dampen investment returns and make inflation more sticky and stubborn, he predicts.

“We’ve seen a period where interest rates went from double digits to zero. That can’t be repeated. The question is how this next phase plays out,” he says.

“I think returns will be much lower, the investment environment will be more difficult and there’ll be more volatility.

“And that means the super system is going to have to work harder to make money for members. It’s going to have to keep an eye on costs, get more out of portfolios and be more efficient in delivering services.”

Looking further ahead, Delaney is eyeing the impact of the shift in the system towards the retirement phase.

“Towards the end of the 2030s and into the 2040s, the system will start to pivot a bit more towards retirement, so we’ll have to have a much more sophisticated approach to retirement than what we’ve currently got,” he says.