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Superannuation: Riding out the financial storm

Every Issue

Cite as: (2008) 82(9) LIJ, p. 81

While many super fund members may view last financial year as an “annus horribilis”, it should probably have little effect on long-term savings plans.

It’s been hard work digesting the vast amoun

t of media commentary on the global credit crisis and its effect on investments in the past financial year.

Understandably, this has led to some trepidation among super fund members, which may be heightened when they receive their annual super fund statement.

However, it is not a time to make quick decisions.

By its very nature, super is a long-term investment strategy and history has shown that market downturns are part of the normal economic cycle.

In the past 40 financial years the Australian sharemarket has experienced 13 years with negative growth.

In all cases the market has returned to higher levels and super funds factor these downturns into their long-term investment strategies.

The declines in 2007/2008 were triggered by the US subprime credit crisis and the bursting of the US housing bubble, and increases in defaults on mortgages to high-risk borrowers.

The resulting “credit squeeze” led to continuing economic and investment uncertainty, which continues to play out across investment markets.

Australian super funds invest in Australian and overseas investment markets, and as the value of these investment markets fell, so too did super fund returns.

This investment fall-out in the last financial year was the experience of investors worldwide.

All major world sharemarkets, with the exception of Toronto, had negative returns and in many countries – including China, France, Japan, Europe, New Zealand and Germany – investment markets fell further than in Australia.

Super fund members should also remember that in the previous four financial years most super fund members enjoyed double digit positive returns.

Yes, your 2007/2008 return is probably negative, but having enjoyed double digit positive returns in the preceding four years your return over five years to 30 June 2008 will almost certainly be positive.

According to SuperRatings,1 the median return over that period was 9.44 per cent for a “balanced” option.

It is also worth remembering that the returns on super are taxed at no more than 15 per cent and this tax is further reduced by any imputation credits. Super is one of the most tax effective long-term investment structures available.

The superannuation industry regulator, the Australian Prudential Regulation Authority (APRA),2 has publicly reported a disparity in performance between different types of super funds.

These differences in performance are borne out in the SuperRatings performance survey, which indicates that on average retail funds returned negative 10.3 per cent last financial year compared to negative 5.9 per cent for industry funds. That’s a differential of 4.4 per cent, or $4400 less for a $100,000 balance.

No doubt you will want to compare your fund’s return with others.

According to the SuperRatings’ universe of 91 funds the median return last financial year was negative 7.5 per cent for a “balanced” investment option.

The worst performing fund returned negative 15.9 per cent. The top 25 per cent of funds were above negative 5.3 per cent and only one out of all 91 super funds had a positive return.

legalsuper’s “moderate” option returned negative 6 per cent.

Super is a long-term investment and its performance should be evaluated over the longer term.

The average super fund member has their savings invested for at least 40 years.

Even members who are nearing retirement will have an investment time frame of 10 or more years, more than enough time to see out the current period of volatility.

Until the end of 2007, the Australian share market had experienced a stellar period of growth, providing a five-year return in excess of 20 per cent per annum. In short, the impact of a negative return in 2007/2008 is likely to be short-lived.

Historically, investors who maintain their investment strategy during periods of market volatility have tended to do better than those who have withdrawn funds and invested them elsewhere.

If you are uncomfortable with the investment option in which your super is invested, review your risk-return profile to ascertain the most appropriate investment option.

If you have any doubts about last financial year, or your super fund, or your investment options, seek expert advice.

ANDREW PROEBSTL is chief executive of legalsuper, Australia’s largest super fund dedicated to the legal profession. He can be contacted on ph 9607 9401 or aproebstl@legalsuper.com.au.

1. SuperRatings is an independent Australian company which specialises in the research of Australia’s industry super funds, corporate super funds, master trust products and non-public offer super funds. Research covers almost 10 million Australian superannuants and close to $500 billion of Australians’ money. See http://www.superratings.com.au for further information.

2. See http://www.apra.gov.au.

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