How to Manage a Compulsory Investment Account when the Market is Against You?
Superannuation is a pension system in Australia that requires employers to pay a compulsory 9% of its employees salaries and wages into a Superannuation Fund. The investment cannot be withdrawn by an employee and can only be accessed when the employee retires.
An employee has the option to increase its contribution from 9% and such additional contribution will not be taxed as a government’s way of encouraging the people to save more. A lot of people take advantage of this in order to pay less tax and obviously to have more money upon retirement.
I just saw a news today that most superannuation funds earned negative returns during the year due to the weakening financial markets. And the worse thing is that my superannuation fund earned a depressing negative 5%! I looked at the breakdown of the return and 1% of this is the ongoing fees charged by the fund.
In general, employees have no control over the way their superannuation contribution is invested by superfunds. I remember when I signed up for the superannuation account, the only involvement I had is to choose from 3 options which are conservative, moderate and agressive. The difference between these three alternatives lie upon the risks being taken by superfund in investing the contribution. Conservative invests more on money market and cash instruments and Agressive invests on equities, a more risky but with higher expected return investments.
With a slowing down financial markets, employees can’t do anything but to accept negative returns on their superannuation investment. With this fact, maybe the least employees can do is to reduce their contribution to the minimum 9% required by the government as the benefit of paying less tax is not sufficient to compensate for the negative returns and paying fees to superfunds for managing the investments. It is also normal to still pay fees charged by superfunds even your investment incurs losses.
In 2005, the government allowed each employee to choose which fund their contributions are paid into which is a good move to give employees more control on their money. In this way, employees can switch over their investments if their superfund is not doing well to another superfund that’s earning good returns! I am thinking of doing this one at the moment but I’m not sure about the cost of doing this. The new superfund might charge employees for transfer cost or other fees which may not make the transfer valuable.
There is a special type of superannuation fund called Do-It-Yourself Superannuation Fund which is a fund established for small number of individuals only. I think this is also a good way of having more control on your superannuation money. However, the negative side of this one is that it requires more involvement and investment skills from the employees themselves which is only suitable for people who have exceptional abilities in the investment world like yours truly!
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Wilson you are right about Do-It-Yourself superfunds. They are not for everyone. You really need the time and skills to make this worthwhile.
However, I think these managed superfunds have been ok over the long-term. I guess it’s only normal that you’ll have some years that generate negative returns.
Check out this website which shows the 5 - 10 year average returns to members of Australian superannuation funds (after management costs):
http://www.asic.gov.au/fido/fido.nsf/byheadline/Long-term+performance+figures+for+typical+super+fund+investment+options?openDocument
Yes Nigel it’s true I haven’t considered the fact that superfunds are long-term investments for people in their 20s or 30s. For employees in their 50s, their time horizon is already short-term as they’re gonna retire soon and they will be more prone to short-term market fluctuations.
It should also be noted that investment performance such as the one in the link above has a tendency to overstate the historical performance in the long run due to survivorship bias which means some funds that have gone bankrupt due to severe losses are no longer included in the performance presentation. Only those funds that have survived overtime and done well are included in the presentation resulting to a higher than the actual return when those funds that have gone out of business are included.
The CFA Institute has established a Global Investment Performance Standards or GIPS which makes investment measurement and presentation around the world comparable. Biases such as the survivorship bias is also avoided with GIPS compliance.
um Wilson.. I don’t think any Australian Superfunds have ever gone bankrupt, so there probably isn’t a lot of survivorship bias. Certainly not in those large funds included in Nigel’s survey.
It is also important to consider the amount of fees charged. Some funds take commisions from profits and some don’t.
I don’t think GIPS would actually help in this case, because it is only designed to make presentation by individual companies comparable. As this is an whole of industry survey, firstly, I’m not sure GIPS is applicable, and secondly even if it is, since the aim is not to promote one fund over another, it’s unlikely that it could actually show the data in a misleading way.
“Certainly not in those large funds included in Nigel’s survey.”
wow did Nigel do the survey himself? are you a surveyor of superfunds return now Nigel?
well, there are a lot of ways by which investment companies measure their investment returns. Some are net of fees or trading expenses and others are at gross of fees or trading commissions. The inputs of the industry surveys are coming from individual returns of superfunds that have presented their returns in their own way, or let me say in their own favourable way. In any case, a global investment measurement standard such as GIPS is very important to add more credibility to industry surveys.
Yes, in hindsight, I think you are correct. GIPS is very important.
If you invest poorly, you might not be able to afford to have racing cars as a hobby when you are older and retired. Or do any of the other thing people like to do when they retire, such as travel, shop, study or drive their kids around like a taxi service
Wilson my good friend, what does my Phillip Island car racing picture have to do with superannuation?
The racing car picture represents all superfunds portfolio managers who can afford to buy expensive racing cars and have racing as their hobby because they have huge bonuses from charging employees sky high commission fees which sometimes not commensurate with their investment skills!
LOL
I wanted to change superfunds last year.. due to the US sub prime crisis, several OZ superfunds got hit badly.. but you know laa.. we cannot anyhow change due to independence issue… Dammit.. i should have just F*** the independence thing..