A comprehensive new survey on member investment choice switching shows that few with access to MIC were panicked by the global financial crisis. What does it take for super fund members to switch? Prior to the global financial crisis many theorised that soaring investment returns were a key reason for member complacency. Despite fears at the time, the introduction of member investment choice back in 2005 had not led to wholesale member switching – neither between, nor within, super funds. Most member were happy to call their default fund ‘home’ and – with record doubledigit returns for many – home seemed like the best place to be. Then along came the biggest financial disaster since the Great Depression. Returns went backwards, banner newspaper headlines revealed one corporate collapse after another and, by October 2008, things were nasty on a daily basis.
At the end of 2008, the Australian share market was down 50 per cent over the year. Yet few super fund members hit the panic button. New research commissioned by the Australian Institute of Superannuation Trustees and conducted by Associate Professor Paul Gerrans of Edith Cowan University reveals that nearly 95 per cent of members stayed put during the worst of the global financial crisis. The survey of 3.4 million fund members involved six of the country’s largest super funds managing a total of $74 billion in assets. And while more research needs to be done to determine whether such member inertia was a result of apathy, lack of knowledge or reasoned choice (or, as many suspect, a combination of all of the above) we need to recognise that these fund members did exactly what they were told to do.
The overwhelming message delivered to members during the crisis was: don’t change; don’t make kneejerk reactions to short-term events; have faith that markets will rebound and super will deliver over the long term. This message was delivered by the super industry, by the government and many sections of the media. Among the minority of super fund members who chose to switch, most were older males with larger-than-average balances who moved from mediumor high-growth portfolios to more defensive, cash-style investment options. Most of the switching occurred during October 2008 (when the Australian share market experienced its largest declines) and March 2009 (when the market was at its low point).
Given the strong rebound on world share markets since April 2009, a large number of those who switched to a cash-style investment option would be financially worse off to this point. In the case of one large industry fund, those that switched to cash in March 2009 were 6 per cent worse off at August 2009. Super funds with members in this situation may need to explore ways of encouraging these people to at least review their current position, particularly if they are some years off retirement. But arguably the bigger story for our industry is the fact that the vast majority of super fund members stayed put in the default fund option – typically the fund’s ‘balanced’ investment option. The clear message for funds – as well as the current Cooper Review into the efficiency, structure and governance of super funds – is that it is absolutely critical that the default fund setting is designed in such a way that it delivers members the best retirement outcome possible.
The default fund deals with the greatest number of people, it deals with the people who appear unlikely to make a change and its asset allocation fundamentally influences their retirement outcome. More than 80 per cent of super fund members are in a default fund. In the case of many not-for-profit funds, this figure is as high as 95 per cent. It may be that more funds will consider age-based ‘triggers’ to encourage their default members to seek advice or at least review their current position. Or it may be that funds introduce age-based defaults or move away from a single default option. The propensity to stick with the default fund also raises questions about MIC. While the average number of investment options among not-for-profit funds is less than 10, some retail funds have more than 100 investment options on offer.
Given that few members actively structure their superannuation to their needs, is it necessary to have so much choice? And who is actually paying for that choice? Moreover, there is a lot of evidence to suggest that individuals do not always act rationally when making financial decisions. Already one large industry fund has moved to reduce the number of investment options on offer to its members. It is also reviewing the labelling of its investment options to ensure they convey the right message to members about risk and expectation. Having survived the biggest financial disaster of our generation, the super industry can move forward with some certainty that members aren’t easily panicked and the default fund will be ‘home’ to most. But more work needs to be done to ensure that the default fund option does indeed remain sweet for the long haul.