Super’s risky big shift and what it means for you

You may not be aware but your super fund could be shifting you into riskier investments. They’re promising better returns but that’s not the only reason they’re making the move.

Some super funds are moving members into riskier assets with the promise of better long-term returns.

One of the biggest super funds in the country is right now moving the bulk of its members up the risk curve in a bid to turbocharge returns.

And there’s every chance most of those affected don’t even know that it’s happening.

We know workers are still disengaged from super; new research from Colonial First State shows 60 per cent don’t even know how their super performed last year.

But as more funds push members into high-growth investments such as equities – and this is exactly what is happening in the nation’s second-largest fund – it’s worth asking whether this is where you want your nest egg invested.

There’s also the question of why funds are taking more risk with members’ savings. A cynic would say it’s at least partly to get on top of the annual performance rankings and drive member growth. The higher fees will benefit them too.

More risk, more reward?

In perhaps the greatest investment overhaul of any major super fund since MySuper was brought in a decade ago, the $300bn Australian Retirement Trust in recent weeks began moving more than 1.4 million of its members from the balanced pool of its life-stage strategy to the high-growth pool, where their retire­ment savings will be over­whelmingly invested in risky growth assets such as equities and private equity.

Australian Retirement Trust chief investment officer Ian Patrick says moving members into higher-growth assets creates more savings in retirement.

Make no mistake, this is a big shift. The fund is stepping away from the traditional default 70/30 investment mix in favour of a riskier 85/15 mix in the hope it will bring better returns for younger members.

Ahead of the change in June, ART chief investment officer Ian Patrick told The Australian the fund had taken the decision to shift members into the higher-returning growth pool because it would lead to a better outcome in ­retirement.

Since early July, ART has been steadily shifting members’ investments into higher-risk holdings and the work is expected to be completed by the end of September, according to the fund’s head of investment strategy, Andrew Fisher.

“We planned this out at least a year ago. You’ve got to make sure you’re not telegraphing to the market what you might be doing,” he says.

“The best interest of our members is at the forefront in this, and we want to make sure we do it low cost, with low market impact, to make sure we get it right.”

Lifestage versus single strategy

The change puts into focus the growing chasm between funds whose default MySuper option is the typical 70/30 balanced fund – including the nation’s largest, the $340bn AustralianSuper – and those with high growth or lifestage MySuper strategies, such as ART and peer Aware Super.

Last year’s returns certainly go in favour of lifestage funds: These high-growth funds took out all top 10 spots for the best returns over the year to June 30. The best of the lot, CFS Essential Super, returned 15 per cent, according to ChantWest research revealed by The Australian this week.

AustralianSuper, meanwhile, returned 8.5 per cent in its default option, while Hostplus returned 7.8 per cent.

But the lifestage outperformance only came through for younger members. These funds, which de-risk as a member ages – usually starting between the ages of 50 and 55 – underperform for older workers over the short and long term, according to ChantWest.

The findings put a spotlight on the power of these big funds and their ability to switch a whole cohort to higher risk without any kind of consultation.

It also raises broader questions about lifestage strategies derisking members, whether it’s suitable for them or not.

This is very different to the single balanced or growth strategy that keeps the member invested in a typical 70/30 portfolio regardless of age.

Essentially, lifestage (or lifecycle) funds front-end the risk – and hopefully the returns – while single strategies spread it over the member’s working life, and beyond.

Sequencing risk

ChantWest head of research Mano Mohankumar says it’s ultimately a philosophical difference between strategies. About 36 per cent of Australians in default MySuper products are invested in lifecycle options through their super fund.

“Some believe in lifecycle, and for older cohorts lifecycle strategies manage sequencing risk; they try to limit any meaningful loss for disengaged members who are approaching retirement,” Mohankumar says.

Sequencing risk refers to market returns around retirement and how they can dramatically impact retirement outcomes.

A major complaint of lifestage strategies when they were first brought to market was they derisked members too early, pushing into very conservative investments too soon, often ending with a 30/70 investment mix by retirement.

The newer versions still start de-risking between 50 and 55 but it’s a much more gradual process to better account for longevity risk. Ultimately funds de-risk members to a higher ending point of around 50 per cent growth assets. But this may push higher over time.

Single strategies, meanwhile, don’t factor in sequencing risk at all. So a retiree in the default balanced option at a fund like AustralianSuper is still 70 per cent invested in growth assets.

The key takeaway here is that lifecycle and single strategies are trying to take different paths to get to the same destination. For anyone with retirement savings in big super, it’s worth working out which one you’d back – and then check if that’s where your money’s invested. And if you don’t agree with being moved up (or down) the risk curve, you can always opt out and direct your fund to a different strategy for your savings.