Long an issue of concern for super funds,
member engagement has become even more critical for the super industry as we
brace ourselves for the very real possibility of negative returns for the second
After more than half a decade of solid returns, one could argue
that most Australians – especially those some years away from retirement –
could be expected to calmly absorb the news that their super had dropped by an
average of 6.4 per cent last financial year. But what if 2009 returns continue to
disappoint? Will the drift to cash continue and will inter-fund switching increase?
Feedback from the not-for-profit sector of industry, corporate and publicsector
funds is that member movement into cash, while notably higher than recent
years, is still relatively small as a proportion of total membership. In the
case of one large fund, a doubling in the numbers of members switching across
to its capital-guaranteed option amounted to a rise from 1 to 2 per cent of
members invested in this option.
Furthermore most fund members have remained in
the ‘default’ investment option of their fund which, in most cases, provides a
reasonably high exposure to equity and property assets. In some cases, more
than 95 per cent of not-for-profit fund members choose this option. During the
worst of the market falls this year, member enquiries increased at call centres
around the country, but no where near to the level that many funds were
anticipating. Indeed, many funds hiring extra staff for an anticipated rise in
member enquiries found this measure was largely unwarranted.
strategies – well in place before the start of the economic downturn – appear
to have contributed to a greater understanding and acceptance that super is a
long term investment and that market volatility is part of the package.
Industry wide campaigns as conducted by the Industry Super campaign have also
assisted in getting the message across. Many individual funds have been
successful in targeted campaigns to older members. But the industry knows it
can’t afford to be complacent.
Just when many Australians need to be putting
more into their super to ensure a comfortable retirement, the poor market
performance is leading to increased doubt and less participation. Many working Australians
are expected to stop making voluntary super contributions, with one recent poll
suggesting that nearly 10 per cent of fund members have done so already. It’s
clear that confidence in our system can no longer be simply addressed by the
mantra of “super is long term investment”.
Funds need to be able to better
explain their products and provide their members with guidance about the
implications of changing investment options or changing funds. Members need to
understand that switching to a conservative investment option or a deposit
product can translate into real long term losses. The recent move by the
Australian Securities and Investments Commission (ASIC) to allow temporary
relief for funds on intra-fund advice restrictions is both timely and
constructive. Super funds have long argued that they need to be able to provide
better guidance on switching out of investment options or the transfer of money
out of one fund into another.
For too long, funds have had to sit back and watch
their members make decisions that they know to be illadvised or ill-timed. It
is hoped that this measure will hasten reform in this area, with industry submissions
currently before Treasury. Similarly ASIC’s industry consultation paper on
end-benefit projections is another positive step. Benefit projections have the
potential to provide a much-needed boost to member engagement and education,
particularly if it they are linked a member’s actual investment option and
Notwithstanding the current market turmoil and the gloomy
economic outlook, super fund members need to understand the importance of
having some exposure to growth assets. History tells us that younger fund
members who flee to the perceived safety of more conservative cash options and
end up remaining there for their working life are destined to be disappointed
with their super payout on retirement.
Recent modelling by Vanguard Investments
shows that a 30 year old who invested $10,000 in the sharemarket in 1978 as
opposed to parking that money in cash, would be a staggering $430,524 better
off at age 60. Over the long term, shares and property will return the best
results for superfund investors. Unless this message is well understood, the
super sector will be hamstrung in its ability to deliver the best outcome for
its members and, indeed, the Australian economy.