Superannuation funds have been nudged to review their target returns and asset allocation after the recent market turbulence, with Rice Warner warning that chasing their past goals may be unrealistic.
The financial consultant has said the ongoing crisis may provide a good reason for funds to review their performance and reset their future objectives.
It has published data showing the average target (expected) returns above CPI for MySuper products (assuming a 10-year horizon). In the past, Rice Warner had separated industry and retail funds due to differing asset allocations, but now, it reported, they are converging.
MySuper funds show a target return which they expect to earn above CPI, after deducting fees and taxes.
The average target annual return above CPI for an industry fund, minus investment fees and taxes, was 3.62 per cent, compared to 3.56 per cent for a retail fund.
The maximum target for an industry fund was 5.7 per cent – above the retail top target of 5 per cent.
Including corporate and public sector funds in the mix, the average target for a small fund (under $5 billion) was 3.34 per cent, compared to 3.76 per cent for a medium fund ($5 billion to $25 billion) and 3.71 for a large fund (above $25 billion).
In recent times, some super funds have reduced their target returns, but Rice Warner noted a number still believe they can achieve similar long-term results, relative to inflation, as they did in the past.
With underlying inflation currently less than 2 per cent per annum, Rice Warner calculated that funds will need to earn 5-6 per cent per annum to achieve their targets – a figure that could be achieved but is likely “disconnected” from realised returns over much of the coming decade.
“For example, [10-year] bonds now yield 1.1 per cent and equity markets usually have dismal performance during recessions, so where will these high returns be made?” the analysis stated.
“If the targets are now too high, should they not be lowered?”
Consumers and risk
The analysis has also noted that consumers are likely to still use past performance for peer comparisons, urging funds to highlight that the past is no guide to future performance.
The only other comparable metric across funds is the target return, which Rice Warner has said must be calculated reasonably to prevent consumers from chasing the highest target without understanding the risk involved or the basis of calculation.
“The range in target returns between funds is large and some appear very optimistic,” Rice Warner stated.
“The layperson would not understand the peer differences in asset allocation and risks taken; the information in MySuper disclosure documents necessarily is dumbed down to meet broad community levels of financial literacy.”
But even so, the consultant has warned the Standard Risk Measure, which shows the number of negative years a fund might be expected to have, is a trivial metric alongside asset allocation and risk taken, which are not a “sensible base for peer comparisons”.
“These metrics are based on each superannuation fund’s mid-range asset allocation, the likely returns for each asset class based on expert assessments and some allowance for additional returns from [strategic asset allocation], including both dynamic and tactical tilts,” Rice Warner said.
“These outcomes, however well calculated, are subjective (as funds use different techniques) and they will be subject to wide variations from year to year due to market volatility.”
Although share prices have begun to rebound, other sectors in the economy such as airlines, airports and REITs based on commercial properties have dire medium-term prospects.
“No doubt, the valuations will stabilise as the economy recovers, but it could take a few years to get back to the new normal, whatever that might look like,” Rice Warner’s analysis stated.
“This must [impact our] expectations for asset classes.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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