For a country where it’s mandatory for employees to save 9.5% of their salary each year for retirement, Australians are remarkably disengaged with their super. If pressed, the average worker might be able to give a ballpark estimate of their current super balance, but few would be able to explain how their super is invested.
Rather than tackling member disengagement, the superannuation industry has largely accepted it and has instead focussed its efforts on building easy solutions for its disconnected membership, which enable them to avoid having to take an active interest in their retirement savings.
Peer comparisons and why they’re problematic
In order to simplify the explanation of super fund performance, the industry increasingly relies on fund performance versus peers. There are several problems with this.
Firstly, peer relativity tends to be about managing business risk and may lead to funds taking excessive risk at the wrong time in the cycle.
This has proven problematic in previous market downturns, for instance during the Asian currency crisis of 1998 and in Australia during the global financial crisis of 2007/2008. In those periods, fund managers were not prepared to deviate from the crowd and sacrifice potential short-term relative performance in peer surveys, when in hindsight that would have been in the members’ best interest.
The way that performance versus peers can overshadow delivering to a fund’s stated objective can be seen in the table and commentary below using AMP Capital’s Future Directions Balanced Fund as an example:
|AMP Capital's Future Directions Balanced Fund||
Median-performing peer fund
|Top-performing peer fund|
|Return after investment fees and taxes for the year to June 30, 2018||8.2%||9.4%||12.5%|
Source: AMP Capital, Chant West Growth Survey
AMP Capital’s Future Directions Balanced Fund comfortably exceeded its CPI + 3.5% objective by 2.45%. However, because of the narrow way in which performance is generally judged, the pressure to improve peer relative returns could create inconsistency in the appropriate risk level required to generate a CPI +3.5% outcome.
As it is, compared globally, Australia has a high allocation to risky assets in the pension system, an approach that has been criticised given our aging demographic. This brings us to the second problem with peer comparisons, which is whether chasing returns is driving inconsistencies in how assets are categorised in peer surveys, thus preventing a true like-for-like comparison among funds, particularly when it comes to the risk/return trade off.
For example, many funds are classifying part of their direct infrastructure and direct property investments as defensive assets. There is some logic in their approach if these unlisted assets have low gearing with stable, certain income but there is concern that it materially understates the risk profile of the fund as understood by the average investor.
There has been a push in recent times to improve fund transparency in relation to costs but little focus on greater transparency from a risk perspective. Risk comparisons based on a simple growth/defensive split could become misleading if assets are not uniformly categorised across funds. Perhaps a more appropriate approach may be to classify funds based on ex-post volatility and explain to fund members, policy committees, trustees and regulators why a fund has adopted this stance.
The investment process and other metrics
To refocus on what matters to fund members, it is important to understand how the industry sets and manages the investment process.
In summary, a super fund’s trustee specifies an investment objective, such as a real rate of return. The fund manager then defines a strategic asset allocation and strategy that offers the best chance of achieving the objective with the least level of risk. This is the process that is applied to traditional risk-based diversified funds.
Most super fund trustees have more than one performance metric against which the success of the fund is measured. These include:
- Performance against a real return (CPI+) or income objective
- Performance of the fund against its strategic asset allocation benchmark
- Performance of the fund against its peers where peer funds are defined as having a similar risk profile which is based on the allocation to growth assets. The typical balanced fund has a strategic asset allocation to growth assets ranging 60% - 80%.
Rather than focus on peer performance, a better system may be for funds to define what they stand for and how they will manage their portfolio relative to these beliefs. Members may be more likely to align themselves with these beliefs and funds could be monitored on how their assets support their philosophy.
In this scenario, the superannuation sector would focus more on the promises it has made to its members, and less on relative performance.
Reconnecting members with their money - and their retirement
While an increased focus on investment philosophy may drive greater connections with members, a more effective way of engaging may be to speak in terms of cold, hard cash.
Currently, superannuation funds report performance to members, rather than truly engaging them with their money. While some may see it as splitting hairs, reporting is, at a minimum, a regulatory obligation, while engaging is about connecting with members and taking them on a journey.
To this end there has been discussion in the industry about moving away from talking about changes in capital values toward communicating a member’s likely income in retirement.
Telling members their fund’s performance was in the third quartile over the last three years gives them information that is of limited use – all it reveals is that their fund performed better than funds in the fourth quartile but not as well as funds in the second quartile. It provides no information about whether they will have enough money to achieve a comfortable retirement.
Instead, when there is another market correction, rather than communicate relative performance, it may be more instructive to inform members that, for instance, although they were previously told they would receive $67,000 a year once retired, they’ll now only receive $62,000 a year – unless they choose to take action. So, if they still want to receive $67,000 a year once they retire, they’ll need to make additional contributions or work for an additional 18 months. This type of information may not be the best news, but it is easy to understand and act on.
And by taking the focus away from peer competition, funds could be better placed to collaborate, share intellectual property, facilitate secondments across the sector to share skills and co-invest, all of which could be for the benefit of members and their retirements.
In summary, everyone could benefit if the industry re-considers members’ information needs and begins to connect and communicate with them in a more meaningful way.
Important note: AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMPCFM) is the responsible entity of the Future Directions Balanced Fund (Fund) and issuer of the Product Disclosure Statement (PDS) for the Funds To invest in the Fund, investors will need to obtain the current PDS available from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL No. 232497) (AMP Capital) for the Fund. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making any decision whether to acquire, continue to hold or dispose of units in the Fund. Neither AMP Capital, AMPCFM nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or particular rate of return referred to in this document. While every care has been taken in the preparation of this article, AMPCFM and AMP Capital make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.