For nearly a decade, the retirement savings of Australians have been swelling nicely, but the Productivity Commission is rewriting the rules of the game and this will affect costs and returns across the $2.6 trillion system.
Results released this week show returns for superannuation funds with growth-orientated asset allocations, which is where the majority of Australians’ money sits, have averaged 9 per cent over the past nine years.
Such a run of positive returns has not been seen since the post-recession market correction of the 1990s, yet only the very brave would make a solid prediction about when things may turn.
As close as Sunsuper chief investment officer Ian Patrick will go to commenting on the years ahead is to say people should not be lulled into a false sense of security that returns will continue at these highs.
“Assets are now reasonably expensive in all asset classes and at some stage you’d anticipate returns have to moderate to bring that equation back into balance,” he says.
As has been typical, the best performers over one and 10 years, as measured by Chant West and SuperRatings, are industry funds. They have relied, to a large extent, on their investments in unlisted assets to provide outsized returns.
Unlisted infrastructure has been a winner for many, although extracting value from those assets may be more difficult in the future.
“We are very mindful that we have to work a lot harder for those opportunities,” Cbus chief investment officer Kristian Fok says.
There is something besides picking market winners that is occupying the minds of super fund executives, which is that the government may soon pick winners of its own, in the form of a top 10 shortlist of the best performing no-frills funds.
This “best in show” list is at the heart of a draft plan by the Productivity Commission to reshape default super.
An expert panel appointed by the government would choose the “best in show” every four years.
The 10 funds that make the shortlist will be rewarded with a steady flow of new customers and contributions.
All other funds that had been receiving default money because of arrangements in awards, enterprise agreements and deals with employers will be cut off.
The resulting changes in cash flow may have to be factored into each fund’s investment strategy. Certainly, funds outside the top 10 will have to work harder and spend more on marketing to grow their membership.
The Productivity Commission insists the effects will be modest and are unlikely to cause any major shocks to the system in terms of contributions flows.
The size of the prize is about $20 billion a year, according to Productivity Commission deputy chairman Karen Chester, which should be viewed in the context of a $2.6 trillion system.
But for those who believe a tolerance for illiquidity is a key foundation upon which superior investment performance can be built, “best in show” matters.
Take Hostplus, for example, which benefits from having a large contingent of young members, a portion of whom are defaulted into the fund.
Those members will probably leave their money with the fund for decades to come, giving chief investment officer Sam Sicillia plenty of room to invest in illiquid assets. Remember, these are the assets that have helped give industry funds the edge.
“You have to structure your investments around your cash flows,” EquipSuper chief executive Nick Vamvakas says.
“If you are not one of the top 10 defaults your cash flows will be very different. Organic growth in superannuation outside of the default system is very tough.”
Sunsuper’s Patrick says the “best in show” proposal raises two issues in particular.
“What will matter most is when a fund loses best in show and the extent of flows away from that fund by virtue of the market signal, and how that will impact investment strategy,” he says.
“The other thing is how much herding will occur amongst the best in show because people will not want to be too different to the pack for fear of falling into the relegation zone.
“Funds will tend to crowd together for asset allocation strategies, at least in their default option. It has the potential to change the time horizon on your investment markedly.”
In submissions ahead of the Productivity Commission’s final report to the Turnbull government, industry funds have expressed concern about increased costs to members and dramatic shifts in cash flow.
First State says the combination of the banking royal commission and growing community distrust in institutions might increase “knee-jerk” shifting if a “best in show” comes to pass.
In funds that lose a significant number of members, those left behind would inevitably face higher costs and devalued assets, First State says.
Key retail funds, which argue they have been locked out of the default market, have indicated support for the “best in show” proposal.
And Chester says the shortlist, along with elevated expectations for funds wishing to act as default funds, will lift performance and returns across the system.
Relatively few Australians are likely to have been following the Productivity Commission process very closely. But given what’s at stake, perhaps we all should be.