AIST CEO Eva Scheerlinck (Pic: Supplied)
Eva Scheerlinck.

Many superannuation fund members investing in so-called Choice products appear to be using those that aren’t suited to their stage in life, consulting and research firm Rice Warner said.

“What we observed when looking at the data of the members who are making choice decisions is that often, on average, they’re going more conservative at nearly all ages when they’re making these choices,” Rice Warner senior consultant Nathan Bonarius told Investment Magazine. “If you’ve got a 30-year-old and they’re putting more money into cash, when they can’t get their money out of super for another 30-plus years, that’s probably not the best position for them.”

In theory, there are cases where Choice products can better serve people who make a deliberate decision to invest in defensive assets due to their risk preferences and liquidity needs; for example, older people who will soon start drawing down, Bonarius said. In practice, however, this is not the norm. Many members in Choice products appear to be using products that aren’t suited to their stage in life, he added.

His comments came after the release last week of a Rice Warner report, commissioned by the Australian Institute of Superannuation Trustees (AIST), that found Australian workers who invest their superannuation in funds outside the MySuper sector could be up to $50,000 worse off at retirement.

The Analysis: MySuper vs Choice report states that the difference could lead to an industry-wide shortfall of up to $52.5 billion in a decade.

The findings led the peak body for the profit-to-member superannuation sector to step up its attack on for-profit funds. AIST labelled non-MySuper products a “drag on the efficiency of our super system”.

The release of the report comes as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry raised concerns over conflicted advice, fees for no service and a range of other misconduct.

The report states that modelling for singles and couples, different income levels, and those who take a five-year career break all found individuals would be worse off in the “Choice” sector. The difference in balances at retirement ranged from $17,000 – for low-income people earning a salary of about $30,000 – to $50,000 for those earning $100,000.

Higher fees were a factor in the findings, with the average total charges (excluding advice fees) in the Choice sector found to be 0.83 per cent, compared with 0.78 per cent in MySuper funds.

Bonarius said the report was not a “blanket statement” but was based on averages, so there would probably be some members in Choice products whose investments outperformed MySuper products.

“The point is, when you look at people making a decision to go into a Choice product, what we’re observing on average is they’re paying higher fees and likely to get lower returns,” he said.

Forward-looking data

The analysis that produced the report’s headline figures is forward-looking, based on projected returns from various asset classes, drawn from an annual Rice Warner survey of investment consultants and asset managers. Applying these expected returns to the allocations of MySuper and Choice members, and adding in fees, the analysis formed a view of what the future performance will be.

The report did include some historical analysis of actual past returns, based on three years of data to June 2017, but the short history of MySuper products – without much time tested by market slumps or recessions – makes this a limited pathway for analysis.

In the three years to June 2017, MySuper members in profit-to-member funds earned an average 8.32 per cent a year, while profit-to-member Choice funds brought in 7.63 per cent. In retail funds, the difference was even more pronounced. MySuper members in retail funds again earned an average 8.32 per cent a year but retail Choice members earned only 5.63 per cent.

AIST chief executive Eva Scheerlinck said earlier this month the group would recommend to the Hayne royal commission, regulators and Parliament that retail banks be stripped of their ability to offer a MySuper product.

“The time has come for every Australian to carefully examine their super and consider the long-term benefits of investing in a good-value, high-performing, not-for-profit MySuper fund,” Scheerlinck said in a statement released with the report. “High fees and poor performing Choice products are a drag on the efficiency of our super system, which ultimately is a cost to all Australians in the form of higher age pension costs.”

A spokesperson for AMP – a retail superannuation fund that offers both MySuper and Choice products – said different products suited the goals of different customers.

“It’s important for customers to consider the performance of their super fund against their own unique goals and risk profile when selecting where to invest their retirement savings,” the spokesperson said. “Different funds are appropriate for different people, depending on these parameters.”

Investment Magazine reached out to several other retail funds for comment but none had replied by the time of publication.

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