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Super funds warn members to expect lower returns

Australian super funds are reviewing their performance targets for MySuper products amid heightened concern about the trajectory of returns in the next few years.

Leading asset consultants are advising trustees of superannuation funds not to expect bumper returns of the last three years to persist in the current low interest-rate environment.

Some are suggesting that the medium-term outlook for most investment classes is subdued in light of the fact that global equities and property are trading near record levels.

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Superannuation funds concede that increasing volatility in Australian and overseas equity markets are forcing trustees to rethink the return targets they advertise to members.

At the moment, some super funds disclose in their product disclosure statements for standard MySuper products that members can reasonably expect returns of between up to five per cent above inflation.

In the last three years most funds have easily exceeded such targets, with median returns for balanced funds hitting around 8.5 per cent.

However, some asset consultants are warning that in an economic environment marked by low growth that super funds may find reproducing recent high returns extremely difficult.

Warren Chant, the managing director of Chant West, says super fund boards are seriously reviewing their targets in light of warnings from asset consultants.

“The general consensus among asset managers is that we’re entering a low growth period,” he says.

“Members should expect returns to be much lower, in the medium-term at least, than what they’ve seen over the past three years.

“In fact, some investment experts are questioning funds’ ability to meet their investment objectives over the next decade, not just for growth options but also for other risk categories.”

Super funds begin to react

In the last month several super funds including one of Australia’s best-performing providers – MTAA Super – have lowered their return targets.

MTAA reduced the target on its MySuper offering from about four per cent above inflation to three per cent, citing difficult investment conditions.

The determination of return targets is not a trite matter.

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Some super funds are lowering their return targets, meaning less money in your pocket.

All super funds are required by the Australian Prudential Regulation Authority to disclose a target for returns over 10 years so that the regulator and members can compare how funds are performing against their stated objectives.

Amendments to return targets are also a barometer of investment sentiment.

When super funds lower their targets it is a sure sign that their long-term investment expectations are deteriorating.

If more funds follow MTAA’s decision, superannuation members may need to review their retirement plans to take account of the likelihood of lower returns.

A key point to remember is that funds will only adjust their targets if they believe the expected decline in near-term returns is likely to undermine investment performance over the next ten years.

So what are the funds saying?

Some super funds are reluctant to respond to questions from the media about possible changes to their investment strategies, electing instead to keep their deliberations secret until they hit members with decisions to raise or lower their return targets.

Bill Watson

First Super CEO Bill Watson.

Others are more transparent and willing to provide insights into the issues likely to affect the retirement incomes of their members.

First Super chief executive Bill Watson says his fund is aware of the challenging environment for returns and is considering proposals to lower return targets.

“Our asset consultant has told us that with interest rates at record lows that risk-free returns will be lower,” he says.

“So, we are being told to expect lower returns compared to the last decade and even the last 20 years.

“The real challenge for a fund like us is to find the best way of defending members’ capital – that probably means we have to look at changing the asset mix.”

First Super’s board will make a decision on whether to lower its return targets at its September board meeting.

Danielle-Press_1

Equipsuper CEO Danielle Press.

Equipsuper and Media Super recently completed reviews of their investment targets and decided to make no changes.

Each of these funds’ MySuper products currently aim to achieve average returns over 10 years of 3.5 per cent above inflation.

Despite not lowering the target, Equipsuper CEO Danielle Press believes the next few years are likely to test the investment strategies of most super funds.

“Over the short-term I think its fair to say we’re going to struggle to meet those targets,” she says.

“In the medium-term I think those targets are still achievable if we learn to manage money smarter.

“We need to be more active in asset allocation – I think the days of passive management and benchmarking against an index are almost over.”

Implications for members and the industry

The bottom line is that asset advisers are telling super funds to expect lower returns in the next few years.

While this might not be a significant issue for people more than a decade away from retirement, it could be vital for people on the cusp of leaving the workforce.

In a subdued investment environment there is a possibility that some super funds may consistently outperform industry benchmarks.

According to Chant West, one of the key factors in a super fund’s ability to protect and build the retirement savings of members will be the degree to which its investment assets are diversified.

Traditional diversification strategies may no longer be as effective as they were in the past and many super funds are now exploring ways to invest members’ cash in new types of assets.

Ms Press says Equipsuper is examining various ways to diversify, including a potential move into direct lending.

Super funds that struggle to match median returns of the industry or that are unable to innovate may be forced to consider merging their businesses with rival funds in the not-for-profit sector.

That means that by 2025 the superannuation landscape could be dominated by fewer players that are each much bigger in terms of members and industry coverage.

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