There’s no doubt that 2008 was a tough year for super funds – the toughest since compulsory super was introduced.
But few in the super industry think 2009 will be any less challenging.
Since the start of this year, most of the key economic indicators coming out of the US, Europe and Asia have been worse than expected. Locally, the data looks just as bleak, with increasing talk of a nationwide recession.
Confidence in our superannuation system is being tested. A growing number of super funds have reported a rise in members switching to cash and there has been a sharp jump in the numbers of older people having to fall back on the pension. Some commentators have gone so far as to question the merits of our compulsory super system while others have called on the Government to temporarily cut the Superannuation Guarantee rate to 6 per cent.
A recent survey by Sweeney Research based on the responses of 1000 super fund members aged over 45 years showed that 38 percent had changed asset allocations within their super funds in 2008, with 79 per cent of those moving into more conservative options. During the boom times, most super fund members showed little or no interest in switching investment options.
The retreat to defensive assets – albeit off a low base – means the management of liquidity will continue to be an uppermost concern for super funds this year, particularly if rising unemployment levels lead to a further drop in super contributions.
While the compulsory nature of super ensures most funds continue to experience solid cash inflows, the drift to cash has the potential to hinder growth-orientated investment and put pressure on strategic asset allocations. In this sort of environment it is critical that funds ensure the profile of their member base matches the profile of their investments.
And while there has been much recent talk of ‘nation-building’ infrastructure investment opportunities for super funds, there are many hurdles for funds to clear. It’s good news that the Government has earmarked some millions of dollars for direct infrastructure spending, but getting the models right to encourage super fund infrastructure investment remains a key objective.
Effective communication between super funds and their members – particularly those approaching retirement – is another major concern facing funds this year as members become more sensitive to fund performance. A second round battering of super returns would undoubtedly test the patience of those in underperforming funds.
As the Minister for Superannuation Nick Sherry frequently pointed out last year, there are large variations between the medium and long-term performances of the best and worst funds. Government measures to require default funds to meet minimum standards are currently under discussion.
Moves by the Australian Prudential Regulation Authority (APRA) to provide its own fund comparison data will put even more pressure on funds to perform. Expect further reductions in the fees and charges levied on members and an even greater emphasis on member communication and education programs.
Meanwhile, the Australian Industrial Relations Commission (AIRC) decision at the end of last year to effectively restore the default arrangements for employers’ compulsory superannuation contributions is welcome.
Contrary to what has been suggested, default fund arrangements – which essentially provide a safety net for workers’ super in a compulsory system – do not impact on an individual’s right to select his or her own super fund. In addition, if an employer and its workers want to nominate a default fund different to that named in the award, they can do so. But for those not able to make such a choice, or not interested in doing so, at least they have an independent umpire to act on their behalf.
A spate of fund mergers is also on the cards this year, spurred on by Government proposals to all allow pension funds to rollover capital losses for taxation purposes when merging funds. While the major not-for-profit industry and public sector funds are expected to increase their share of the total market, at least 10 small corporate and industry funds – notably those with an ageing membership – are believed to be finalising merger deals.
The tough economic climate has also reignited the adequacy of benefits debate. A recent Access Economics survey shows the average worker can now expect $1318 less a year in retirement income, or $25 less per week than in 2007 when the sharemarket reached record highs. Measures to plug the gaps in superannuation levels – long called for by AIST – are now even more important than ever. The inclusion of retirement incomes in the Henry Tax Review – due to conclude later this year – provides a rare opportunity to fix the system so that all Australians get to enjoy a reasonable of standard of living in retirement.
2009 also presents an opportunity for super funds to hone their climate change investment strategies ahead of the global climate talks in Copenhagen in December and the proposed introduction of Australia’s carbon pollution scheme in July 2010.
While many argue that the Government’s proposed 5 per cent emission reduction target (with potential to rise to 15 per cent on a global agreement) has reduced the bottom-line risk to affected companies and, consequently, super funds, the Australian Industry Group recently suggested that business compliance costs could be as high as $7 billion in the first year of the scheme.
So, like everyone else, the super industry is bracing itself for more testing times ahead. The good news is that our industry’s solid record of governance and risk management, coupled with our comprehensive regulatory framework, means we are better placed than many to face the music should it get any louder.