Just as the government kicks off its highly contentious “early release” scheme for superannuation, we find out that the month of March threw up the worst monthly performance in super since the compulsory system kicked off in 1992.
What a sorry coincidence! A 9 per cent plunge in “growth” and a 6.8 per cent drop in the value of “balanced” superannuation portfolios over 31 days will do nothing but accelerate the urge to rush for perceived safety.
We are going to see at least a million Australians line up to take out super long before they should.
Dramatically negative numbers will also revive notions of “switching into cash” as a defensive stance against crisis ridden markets.
But here’s the thing: both those notions are seriously flawed. “Early releasers” will never recover the compounding an investment will make over a lifetime in super, and switching to cash is not an investment strategy, it’s an investment surrender.
Yes, those monthly figures are breathtaking, but so was the sight of major funds easily pulling in 10 per cent plus per annum in recent times.
Moreover, if we measure super returns on a one-year basis – which is surely the minimum timeframe we should discuss – the figures improve instantly. For balanced funds – the most commonly held products – the one-year figure is negative 1.7 per cent, which is bad but hardly insurmountable.
We need to always think of super as the ultimate long-term investment. This notion of lifetime saving has now been punctured by the early release scheme, where under certain conditions the government will allow anyone, at any age, to take out a total of $20,000.
Industry researchers such as ChantWest – which produced the latest figures – show that over a long period of time super grows at near 6 per cent a year. There is nothing in the markets so far this year to threaten that proposal.
As for switching to cash, surely the remarkable bounceback in recent weeks tells those who are still considering switching out of risk and into the guaranteed non-returns of cash deposit “savings” that moving out of the markets is not the answer now.
Perhaps the key issue revealed by the financial dimensions of this latest crisis is the increasingly obvious weaknesses of the super system.
Risks behind the numbers
Behind the numbers there are real issues such as sequencing risk, where older people can pay a high price if they retire and take out a lump sum shortly after a global crash.
There are also key issues such as definition. Is 70 per cent growth and 30 per cent defensive really a “balanced fund”? Do some funds have poor structures that will struggle with any outflow demand (We will soon find out as hospitality fund Hostplus – which is selling property assets – gets ready for an avalanche of early release claims.)
The worst element of super (outside of the self managed super fund system) is the poor choice between retail – which has been shown to have serious management issues in the recent royal commission – and trade union linked industry funds – which lack transparency in their unlisted assets and can have a unhealthy concentration of age groups on their books.
More recently, there has been some innovation with “life cycle” super where the age of the investors is taken into consideration and there is a move towards more conservative allocations as clients near retirement: Roughly 40 per cent of the funds in the MySuper system are now in the life cycle category.
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