Can your super handle another financial crisis?

Australian retirees and near-retirees may be vulnerable to another GFC through their super accounts.
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01.Shares versus fixed interest investments

share or fixed interest in superannuation

Australian superannuation funds are more heavily invested in the share markets than at least 12 other countries with comparable retirement schemes.

For consumers and policymakers concerned about another GFC, the report by the Financial Services Council (FSC) could serve as a cautionary tale. An earlier CHOICE investigation revealed that Australian super fund holders in the “retirement risk zone” – about five years before and after retirement – were overly exposed to the share markets in the lead up to the GFC. This resulted in a significantly reduced nest egg for many older Australians.

The FSC report highlights some striking differences in asset allocation among the 12 countries, which include Canada, Japan, the Netherlands, the UK and the US. For instance, fixed-interest investments such as bills and bonds – which hold their value despite share market fluctuations – make up less than 10% of super accounts in Australia. In Denmark, fixed-interest assets make up 65% of retirement funds. 

Similarly, exposure to shares in Australian super accounts is 50%, the second-highest of the 12 and surpassed only by Hong Kong at 65%.

While Australian super funds have recovered significantly over the past year, Australians close to retirement age remain vulnerable to a replay of the global financial crisis, the report suggests.

“The current overall allocation, which provides a high level of exposure to potentially volatile assets, will become less appropriate as the baby boomers retire and begin to draw down their funds. A broader range of assets, including corporate bonds and credit, is likely to provide a better long-term outcome for these members.”

For near and recent retirees, another GFC in the short-term could be costly. The S&P/ASX 200 fell 40% between March 2008 and 2009, and most funds lost about 17.5% of their value as a result. From 2008 to 2010, Australian super funds were the third-worst performing retirement funds among the more than 30 OECD countries. Only Portugal and Estonia fared worse.



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