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Super fund members are jeopardising their retirement savings by
switching into higher risk investment options at the height of the market and
into lower risk investment options as markets are falling, analysis of member
switching behaviour by Watson Wyatt has revealed.  Watson Wyatt analysed around 1750 switches by
members  in four of its corporate super fund
clients and found they were demonstrating typical  retail investor behaviour by buying high and
selling low. The findings were based on data from funds in 2007 and 2008.  In 2007, as markets were rising,
“overwhelmingly people were switching into more risk”, according to David
McNeice, principal of Watson Wyatt. 

The
only exception was the month of August, when the highly publicised sub-prime
crisis took hold and switches to less risky investment options spiked.  “It’s close to 90 per cent in the first half
of the year switching  into more risk and
maybe 75 per cent in the second half of the year, with the exception  of August,” McNeice said after a presentation
to a Fund Executives Association Limited national briefing in Sydney last month.  “Apart from that blip, in the balance of 2007
about three quarters of the switches are going to more risk, so they are buying
into a rising market. In 2008, overwhelmingly, about 80 per cent over the
course of the year are switching away from risk.

The frequency of switching
increased in the second half of the year quite rapidly.”  Watson Wyatt also examined  patterns among voluntary contributions in
excess of SG during this period, and found contributions remained relatively
stable in 2007 with the exception of June, reflecting a rush to top up super
accounts ahead of the introduction of new legislation capping the amount of
non-concessional contributions at $150,000 per year.  Likewise in 2008, Watson Wyatt found no
discerning trend indicating members had reduced voluntary contributions  when the markets turned south. 

“This would suggest that once people are on a
higher level of contribution they tend to stick to it,” McNeice said.  “That’s a helpful way of improving retirement
savings. Pay rises are not particularly common in the current environment  but when we get back to a more normal
environment, if there’s a facility where people, instead of taking extra take
home pay, can convert it to a voluntary contribution, that’s more likely to
stick and that will help their savings in the long run.” 

McNeice also considered the use of defaults
among group insurance and found high use of defaults across a range of age
groups.  Of the 210 survey respondents,  half of those in their 30s relied on the
default level of insurance  cover but
when asked if they believed this cover was sufficient, only 45 per cent of
those in their 30s said ‘yes’. 

 

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