Over the past 20 years, the median fund returned 6.6 per cent per annum, which is in line with the consumer-price-index plus 3.5-per-cent target that many balanced options state in their objectives.
Most funds are in the process of distributing annual member statements with a message of positive, albeit modest, performance. While results are currently positive, it is important that the superannuation industry prepares for how it will communicate the inevitable decline in long-term returns. In previous periods of relatively weak short-term performance, the industry had the luxury of stronger longterm performance over five, seven and 10 years to fall back on. However, with the double-digit returns experienced though the bull markets of 2004–2007 beginning to drop out of rolling-performance numbers, the long-term picture is likely to turn bleak.
Regulatory landscape slowly clearing
Over the last few years the superannuation industry has faced significant change and uncertainty as the raft of regulatory reviews move slowly through the legislative process. The industry is finally starting to gain some sense of clarity, despite surprise additions and omissions as each piece of legislation is revealed. For many funds it has been as difficult to respond with product development and innovation as it is difficult to play by the rules while they remain unknown.
For retail funds in particular, responding to the Future of Financial Advice reforms has meant most have been actively reviewing their existing product suites and either refining or launching new products.
MySuper takes shape
Among the various initiates from the Stronger Super reforms, MySuper remains front and centre. In order to shine the light on potential MySuper products, SuperRatings conducted a survey of the likely characteristics of new MySuper products. The results provided interesting insights into the direction different sectors of the industry were heading. For 80 per cent of not-for-profit funds, the existing default option is likely to be retained as the default MySuper investment option. Retail master trusts, however, appear to be taking a different road, with 40 per cent of them likely to launch a new option, which in 30 per cent of cases is a lifecycle lifecycle option. However, the late regulatory change to reduce instances of cross subsidisation and allow up to four age cohorts and investment price points may see this change.
Investment approaches are also expected to differ, with 40 per cent of retail master trusts likely to use a passive approach. Not-for-profit funds differ in this respect, and are likely to continue to use active management, along with higher levels of investing in alternative assets. For most not-for-profit funds, maintaining the status quo appears to make sense given the funds’ strong view that existing default options remain geared for their membership, negating the need to change what is already working. The higher use of lower cost passive investing, along with greater visibility around administration and true investment-management costs, will lead to a material reduction in retail fund-investment management fees. Coupled with the removal of imbedded commissions, this will lead to a material 40 per cent reduction in average fees, compared to current retail offerings. For most not-for-profit funds, fee levels are likely to remain the same, which will erode their fee competitiveness.
The fees squeeze
An unfortunate by-product of the reform debate has been the significant focus on fees. While fees are a very important consideration in retirement outcomes, a fee race to the bottom will not necessarily lead to the best outcomes for members. We would not like to see positive investment approaches abandoned purely for the sake of low fees. In the end only one fund can claim to be the cheapest, and it is therefore critical for all funds to understand their value position and be able to communicate it internally and externally. Other critical components of the MySuper offering – insurance and advice – are also becoming clearer. Most not-for-profit funds are continuing to offer a solid suite of insurance arrangements, including income protection. Conversely, retail master trusts are more likely to simplify their offerings, with income protection less likely to form part of MySuper, incentivising members to join the choice segments. Intra-fund advice is likely to be offered, but under a fee-for-service model for retail funds and subsidised by most not-for-profit funds.