Default funds: Sharing the super space
If increasing Australia’s superannuation savings pool is the aim of the game, introducing competition to the default funds space is a logical solution, writes Patricia Montague.
Last month applications were made to the Fair Work Commission about the Modern Awards system, which classifies default funds in superannuation. The employment awards under which millions of Australians are employed determine who will administer their superannuation and are reviewed every four years.
Only funds which offer a generic MySuper product are eligible for inclusion. Introduced as part of the Stronger Super reforms announced in 2010, MySuper was created to make superannuation simpler and more transparent for customers.
Under MySuper, any fund wanting to receive default superannuation contributions was required to introduce a low cost, no frills superannuation option.
In a default environment, ultimately it should be about what is the best outcome for customers. With a number of low cost, competitive products now in the market, there has never been a more opportune time to deliver these outcomes for customers.
All Australians deserve a choice when it comes to their superannuation, but we know many do not exercise the option to do so, with about 80 per cent of people invested in their providers’ default option.
It is for these people that MySuper was intended. Of the countless offers out since the introduction of MySuper at the beginning of the year, retail funds have some of the best performing and competitive MySuper funds in the market.
Lifecycle style funds make up a large part of what is available under MySuper. Lifecycle strategies aim to grow a customer’s superannuation balance by adjusting the asset allocation as the customer ages, gradually reducing the allocation to riskier assets as the customer nears retirement.
Actively managed over the long term, a customer in younger years will have exposure to a broader range of riskier assets in order to build up their savings while they have the benefit of time on their side. Closer to retirement they are exposed to less volatile assets in order to protect the retirement savings they have built up over time.
The active management around this style of fund ensures customers are appropriately positioned in accordance with the market conditions at any given time. This active approach to investment management balances the desire to achieve strong investment returns, and the risks associated with that, with the needs of customers to prepare for retirement.
As you will see in the adjacent chart, research by AMP Capital shows over a 100 year period, the value of $1 invested from 1900 in various assets demonstrates that shares and other growth assets provide much higher returns over the long term.
Of course we know sequencing risk can have devastating impacts on a person’s retirement income. But superannuation is an investment for the long term, and a very tax effective long term investment, allowing people to save more money at a lower tax rate.
The evidence shows that to build wealth over a long period, being invested in equities is where you will see the highest returns and part of the reason why real returns in superannuation have been strong over the past 20 years or so is because of the relatively high allocation to equities.
This is where the benefits of active management really come to the fore because active management ensures customers are appropriately positioned for prevailing market conditions.
The Association of Superannuation Funds of Australia’s Retirement Standard estimates that for a ‘comfortable retirement’ a customer would require nine to 10 times their final salary at the point of retirement. The AMP Retirement Adequacy Index shows the average super balance for a 60-64 year old is $77,213.
Much of the intent behind MySuper is to grow a customer’s superannuation in such a way as to give those who aren’t engaged with their superannuation the best opportunity to maximise their pool of savings to help fund their retirement. Essentially many people have little interest in their superannuation mix, asset classes or even share market returns. What they want is to know that when they retire they will have money to live on, and to enjoy whatever it is that the luxury of time allows them to do – be that travel, hobbies or spending more time with family.
We need to be able to take advantage of appropriate opportunities, what we might call trigger events, to engage with customers about their superannuation. These events provide an opportunity to engage with the person so that they have an understanding of what impact this event could have on their superannuation savings or insurance. Should they use it as an opportunity to increase their discretionary savings for example? A trigger event might be something like changing jobs, having children or approaching retirement.
All Australians deserve choice when it comes to their superannuation and those that engage with their superannuation early are likely to see the greatest benefit in their retirement. But as it stands we know that it is overwhelmingly the case that customers aren’t engaged. Hopefully as an industry we will get better at educating people on the benefits of being engaged in order to maximise their chances of securing the best retirement outcomes possible.
A competitive superannuation environment will ultimately lead to the best outcome for customers. If the outcome of the default superannuation review was a greater number of funds competing under the Modern Awards, then customers would be the biggest winners from that increased competition. Customers will benefit by funds competing to secure a good investment performance and providing services to customers which assist them in achieving their superannuation goals.
Compulsory superannuation was in part a response to the financial challenges presented by an ageing population. It was hoped that mandatory superannuation would ultimately lead to a country of independent retirees. We still have a way to go before we see that realised, but with recent recommendations to increase the age pension qualifying age, it is likely that Australians will be working longer.
What most customers are looking for is certainty that they will achieve real investment outcomes, an income that will provide for their retirement. The lifecycle funds should go some way towards achieving this. Providing greater competition in the default superannuation market will further enhance it.
Patricia Montague is director of superannuation and investment platforms at AMP.
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