Superannuation returns moderate but big changes are afoot

Not even a good performance by the Australian share market was enough to turn superannuation returns positive for May, according figures from SuperRatings.

The typical balanced option return was -0.7% in May, with most of the fall due to funds’ international share exposures which were dragged down by worries caused by the re-emergence of the US-China trade conflict and uncertainty surrounding central bank policy.

For the year to 31 May, balanced funds in accumulation mode returned a healthy 5.1% and those in pension mode did better at 5.8%.

Funds in pension mode were helped by lower exposures to growth assets and bigger exposure to bonds, which have been rising as interest rates fall.

The negative international news pushed the international share option down 4% for May while Australian shares rose 1.4% during the same period, showing the benefits of diversification.

The news of a slightly muted performance near the end of the financial year came as the Morrison Government decided to go ahead with the Productivity Commission’s call for a detailed review of Australia’s retirement income system.

While the scope of the inquiry is yet to be finalised, it is likely to cover the main retirement planks of the age pension, superannuation and savings outside super.

There are many pressing issues that the inquiry will need to cover.

How much super to put aside

At the moment most superannuation funds argue that the current 9.5% of salary being contributed needs to be progressively increased to 12%.

The transition to 12% has been slowed down by the Morrison Government and there is a lot of controversy about whether the amount of super needs to be increased at all to provide an adequate retirement income.

The Grattan Institute, for one, has argued that 9.5% is already adequate when you consider savings outside super and the safety net of the age pension and the fact that super should not be regarded as something to be passed on to children.

Given that super should be exclusively for retirement income, the Grattan research showed that is not happening with the median pensioner, at death, still having 90% of the wealth they took into retirement.

That may be so but retirees need to be careful with their retirement nest egg because they don’t know how long they will live and how expensive their health care costs could become.

Longevity risk needs new products

That uncertainty about longevity – known as longevity risk or the risk that you will outlive your retirement savings – should have produced a range of super products to counter that risk.

Annuities were thought to be one of the ways to overcome longevity risk but they have arguably failed in that regard due to the exceptionally low interest rates that have suppressed the amount of income that can be purchased for a reasonable price.

While retirees would be happy to have a set income for life compared to the uncertainty that comes with an account based pension that rides the ups and downs of the share and money markets, annuities at the moment just offer too small a return to be worth the peace of mine for all but the most wealthy retirees.

Instead, the age pension becomes the effective annuity back stop for most other retirees, even if it does offer a more restrictive lifestyle.

Housing policies are crucial

One of the accepted political standards is that the family home is sacrosanct which is why it is one of the few investments that is exempt from capital gains tax.

In terms of retirement policy, the family home is also considerably advantaged because it is not included in the pension assets test.

But with many more people retiring with considerable debts and also living in rented accommodation, there are questions about whether that policy is fair and reasonable from here on.

Obviously, you can’t eat your house but under the current rules there is nothing stopping a retiree from living in a multi-million-dollar house and still claiming the age pension, although they might struggle to pay the council rates!

The only answers to including the family home in the pension assets test are forcing elderly people to move, which is never a good look, or ensuring that there is a range of reverse mortgages that can be used to finance ongoing living costs.

There are no easy answers here but this is another issue the inquiry needs to come to grips with.

Bloodsucking super funds

One of the many interesting results from the Hayne Royal Commission was to highlight the fact that many superannuation funds are not focussed on maximising their member’s retirement benefits.

Indeed, some seemed to be money making machines designed to funnel fees towards their owners, with their members providing the cash flow.

In simple terms this was portrayed as being a gap between industry funds and retail funds, although there are good and bad versions of both.

While industry funds as a whole have lower costs and better returns, the real issue here arises from the lack of involvement most people have with their superannuation.

Lowering fees and raising the performance of super funds is a vital aim that the inquiry should be looking at.

The Productivity Commission has already found that poorly performing super funds are costing their members hundreds of thousands of dollars in lost retirement income.

One way to help that problem is to encourage the rationalisation of the industry with poorly performing funds progressively weeded out or merged.

Performance taking precedence over inertia

Another problem the Productivity Commission has already identified is that people often end up stuck in underperforming funds they don’t really choose.

Some are just lumped into a fund due to industry awards; others might choose a good fund that goes bad over the years.

One of the answers that the Productivity Commission suggested is that fund performance should be used to determine where default super goes, rather than workplace agreements and awards.

We all know that competition helps to keep prices down and customer service up but competition has been sorely lacking in the super industry.

This lack of competition is sure to be addressed in the inquiry.