Superannuation funds are the main source of retirement income for Australians. This makes the rate of return of these funds a matter of national interest. So, how have Australian Super Funds performed?
According to a three year study by the Organization for Economic Co-operation and Development, OECD on the nominal annual average return of super funds, Australia is way at the bottom of the league. The annual return of Australian superannuation funds was –2.8%, which puts Australia in the company of Spain (-2%), Portugal (-3.1%) and Estonia (-3.7%). Portugal and Estonia were the only OECD member countries with lower annual super returns than Australia.
How is this possible? Australia is one of the few developed companies which can boast a steady growth throughout the last four years of world financial crisis. According to Geoff Kingston from Macquarie University, the answer lies in the aggressive investment strategies of most Australian super funds.
Investment funds allocate assets depending on the risk tolerance of its investors. It seems that Australian super fund investors are the financial equivalent of a sky diving club. According to a report by the OECD on pension funds, most pension funds invest most of their assets in bonds and bills. Australian super funds, however, invested four times as many assets in shares than in bonds and bills. This makes Australian super funds highly sensitive to losses in the stock market.
Another problem with Australian super funds is their high operating costs. According to Professor Kingston, this problem is linked to Australia super fund’s addiction to shares. According to him, financial planners for super funds encouraged investments in high-growth choices, such as shares, because they provide super fund managers with higher commissions and fees.
Ironically, Australian workers are among the best retirement savers in the world with $US1.1 trillion in pension funds, which places them in fifth place behind Holland, Japan, UK and the US.
Workers who choose to manage their own super funds have more control over their retirement fund, pay lower fees and commissions and can choose the risk level of their investment portfolio. Flexibility and risk control allow Self-Managed Super Fund managers to fine-tune their super fund portfolios to their risk aversion level and to their personal circumstances. For instance, a young worker with potentially several decades before retirement can tolerate more risk than a 58 year old worker who has only a few years to reach retirement age and may want to be more conservative with the assets they choose to invest in.
