Rebuilding your super

There are ways to take control of your superannuation. We answer your most frequently asked questions.
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01 .Introduction


In brief

  • Members are most concerned about the future and poor investment performance.
  • They question the quality of financial advice – some readers profited by going against the experts’ advice.

The global financial crisis has decimated many Australians’ retirement savings. Members have told us they did the “right thing” by making extra superannuation contributions, only to end up losing one-third or more of the balance in a matter of months.

In the wake of such devastating losses, CHOICE readers – particularly those close to retirement – want to know what steps they can take to rebuild their nest egg or limit further damage. We’ve compiled answers to some of the most common questions you’ve asked us:

To help weigh up the options, in mid-March we consulted some financial planners. Bear in mind that financial advisers should only ever be a means to an end, not an end in themselves; use the information they provide only as part of your financial education. As we highlight here, some of our readers fared best by using their own research and judgment to go against the “expert advice” provided to them.

Please note: this information was current as of May 2009 but is still a useful guide to today's market.

Getting advice

Super funds offer general information over the phone. For more specific advice about your situation, you might want to find a good financial planner, though last shadow shopping by both CHOICE and the Australian Securities & Investments Commission (ASIC) found the quality of advice provided by licensed advisers differed enormously – often for the worse. For tips on finding a good one, go to ASIC’s consumer information website Fido. At a minimum, make sure the planner has an Australian Financial Services Licence (AFSL), or is an authorised representative of an AFSL holder. You can check the licensee register at ASIC.

Financial planners sometimes provide a free initial consultation. The second appointment may have an hourly fee, but in most cases, financial planners are remunerated by commissions from your investments that are based on their recommendations. We want to see commissions banned as they cause unacceptable conflicts of interest.

If you’re unhappy with the advice you receive, there are avenues for redress.

  • Make an official complaint to the financial planning company.
  • If that doesn’t resolve your complaint, contact the Financial Ombudsman Service (1300 780 808).
  • The adviser or company may also be a member of the Financial Planning Association, an industry group with a code of practice and a complaints investigation scheme.

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Can I switch to safer options?

If you’re tempted to switch to safer options within superannuation, it’s important to know which investments are genuinely safe in this rocky climate.

You might assume funds with the following names to be safe:

  • Conservative
  • Defensive
  • Capital safe
  • Secure
  • Fixed interest
  • Capital guarded

However, data from the research house SelectingSuper found that in 2008, “capital stable” super funds, for example, lost on average 8% of their value. Some had up to 55% in so-called “growth assets” such as shares and property, but only a handful of the 100 or more funds in this category had a positive one-year performance. Five-year performance was better, at about 4% per annum.

On the other hand, the funds that fall into SelectingSuper’s “cash” category, which usually invest in safer bank deposits and government bonds and do not diversify into shares, returned more than 5% in 2008. So somebody who invested their balance in cash instead of the average capital stable option early in 2008 would have had 14% more by the end of the year.

Those invested in the somewhat riskier “fixed interest” funds, offered by large super funds, returned 8% in 2008 (and about 3%-4%pa over three and five years). These funds invest in government and company bonds, debentures and other interest-paying securities. They’re generally conservative, but there’s a chance of negative returns in some years. Some put a portion of money into assets that aren’t considered “investment grade”, such as emerging market debt.

Bear in mind, fixed interest does not refer to the high-risk mortgage funds and debentures that haven’t been assessed by ratings agencies – some in that category have collapsed in recent years, losing investors billions of dollars.

In short, you cannot rely on the names or labels on funds if you’re looking for a low-risk option. You need to dig deeper to find out where they invest.

The table, below, compares two industry funds and illustrates how the term “balanced” is interpreted differently. The REST balanced fund invests 55% in growth assets such as shares and property, while CareSuper’s balanced fund invests 75% in those assets. This goes some way to explaining the difference in short-term performance. Problems around labelling cross all superannuation funds (corporate, government, industry and retail) and categories (conservative, balanced, growth and others) and not just industry funds’ balanced options.
Why fund names are meaningless

Can I manage the downturn?

While switching to cash can reduce volatility and stem further losses, it may not be a sensible decision in the long term. If share markets eventually pick up, switching out of a balanced or growth fund now could leave you worse off later. If you do switch to cash now, you may need to consider a strategy to move some money back into growth assets in the future. The trouble is, timing the highs and lows of markets is notoriously difficult and missing out on the best days of a recovery can be costly. For example, between 6 March and 17 April 2009 – just five weeks – the Australian share market rose by 20%.

Diversification is a key risk-management strategy. If you choose to put all your eggs in one basket, you could lose almost everything, particularly if the investments are poor. This happened to DIY investors who invested in property-based investment schemes such as Australian Capital Reserve, Bridgecorp Finance, Fincorp and Westpoint. Investing in just one or two companies’ shares is also risky. Several of our largest 200 companies lost over 90% of their share value in the last two years, including ABC Learning and Babcock & Brown, which is in voluntary administration.

Paul Gerrard, a South Australian adviser and former director of the Financial Planning Association, suggests a well-diversified portfolio that includes fixed-interest investments, property investments and investments in shares in Australia and overseas, as well as making sure the portfolio is managed by a number of independent and reputable managers with good track records.

03.Could my fund go bust / balance fund


Could my fund go bust?

It’s possible, but relatively uncommon. One risk is with corporate defined benefit super schemes, which are only as strong as the parent company.

Generally, super fund trustees have fiduciary responsibilities to manage members’ money in their best interests, and while the trustees of regulated funds are licensed and supervised by the Australian Prudential and Regulatory Authority (APRA), even funds with licensed trustees can fail. Limited compensation may be available if this happens; to check your fund is registered, check the APRA website

Sometimes, super funds operate illegally and outside of regulation. In 2007, the Perth-based Strategic Capital Super Fund (SCSF), which hadn’t been approved by APRA, suffered losses as a result of allegedly fraudulent activity and theft from the fund. And while legislation provides financial assistance to funds that have suffered losses due to fraudulent conduct or theft, there’s no compensation for bad investments. The federal government paid a financial assistance grant of nearly $1.5 million to SCSF members to cover 90% of the alleged fraud losses, but didn’t cover another $9 million lost due to poor investments by the fund.

Should I stay with my balanced fund, as my financial adviser suggests?

The conventional message from many in the industry is to stick with your long-term strategy despite the events of the past two years, but financial planners CHOICE contacted were divided on this issue.

“If the appropriate steps were taken to ensure the portfolio chosen for you is aligned to your personal circumstances, timeframe and risk profile, then it is probably a good idea to follow the advice provided,” says Wilson Luna of Sage Financial Services, an authorised representative of planning company Financial Services Partners.

“Sticking where you are could be very appropriate advice or very inappropriate advice – it depends on where you are, where you want to go, and what you want to avoid,” says adviser Paul Gerrard.

“You should hug your adviser for encouraging you to do the right thing and preventing you from crystallising further losses,” says Andrew Carra, an authorised representative of Garvan/MLC Financial Planning. “A well-diversified portfolio and patience is your best defence during a bear market.” He says hiding out in cash while you wait for the recession to end could mean you miss cashing in on the recovery, which some economists are tipping to start in late 2009 or 2010.

Queensland planner Bruce Baker says it’s important investors are comfortable with both the risks and potential benefits of any strategy their adviser puts forward. “Be wary of investment dogmas that might work during a bull market, but perhaps not at other times. For example, the dogma of ‘time in the market rather than timing the market’ promoted by some fund managers can be dangerous, but it works during a bull market.”

04.Decades until retirement / Close to retirement


I'm decades from retirement. What can I do?

Firstly, there are no right answers based simply on your age. Although younger people have much more time to make up for current losses, this shouldn’t mean sticking with a fund that doesn’t compare well against its peers for performance, fees, services and insurance.

For those prepared to take a long-term view, with a balanced to aggressive risk profile, Luna sees “great opportunities now to invest in sound assets at very attractive prices” – but he warns to be prepared for more volatility.

“Consolidation of super accounts to minimise fixed costs such as administration fees is a good idea,” says Sam Wall, Executive Manager of Technical Services at Colonial First State. “Understand how much you’re paying to invest in your fund and what advice, if any, you’re receiving in return. Review your insurance situation – it can often work out cheaper to buy death, disability and income protection insurance via your super fund” (see Credit protection insurance sham).

I’m close to retirement. What can I do?

Again, there is no correct strategy based simply on age. This is an area where you may benefit from professional advice about both your investment options and your overall strategy for retiring. The following are some of the options put forward by advisers.

  • Cut costs “The only sure way to survive a major downturn in markets and ensure financial security is to reduce your cost of living and manage those costs with discipline,” says Bruce Baker. “One useful guide is that in retirement, if you keep your cost of living to 4% of your net investment portfolio balance (not counting your home), you can survive the bad times with most of your capital intact. You’ll have a reasonable chance of rebuilding in the following period.” Of course, you may need to have a fairly large super balance or cut living costs significantly to make the 4% guideline work.
  • Delay your retirement “This would provide you with an opportunity to contribute more to your super, and hopefully allow your investments to recover from the market downturn,” says Luna.
  • Check eligibility for Centrelink payments Contact a financial information service officer at Centrelink to find out about your entitlements, which may include a part pension and rent assistance.
  • Transition to retirement pension This allows you to continue working and contributing your earnings to your superannuation fund, while drawing out money from a transition to retirement pension fund to live on in the meantime. The overall effect is you’ll pay less tax and boost your superannuation fund for when you fully retire. For more information see Ease into retirement

05.Risks of industry funds / Member comments


Hidden risks of industry funds

Are the returns reported by not-for-profit industry funds really as strong as we’re led to believe? When Chant West consultants looked at the performance of “growth” funds, which have between 61%-80% in property and shares, it found industry funds reported 6% higher returns than retail funds in 2008. One theory, which is now being examined by the regulator APRA, is that the rosy returns could be propped up by industry funds’ heavy investment in direct property, unlisted infrastructure and private equity.

As unlisted property is valued every three months at best, industry funds’ 2008 figures may not reflect the full extent of the commercial property market’s slump. In contrast, retail funds invest in property trusts listed on the Australian Securities Exchange – the value of trusts changes every day (although the trusts’ underlying property investments are less regularly appraised).

Industry Fund Services, a group representing the industry funds, defends the figures, claiming listed property trusts tend to be more highly leveraged (they borrow more) with an additional layer of fees. “Often their investors have sought to sell their holding, further pushing the price down,” says a spokesman. “That’s not the case with unlisted property, where several industry funds group together to buy a property for a long term.”

Member comments – Bad advice and high fees

Many CHOICE readers told us they felt burnt by the financial advice they’d received, especially when the dubious recommendations and poor investment performance came with high fees. Some respondents took matters into their own hands and benefited by going against their planner’s advice.

  • I wonder why I bother to make contributions when they’re always gobbled up in fees, which are calculated as a percentage of my balance. Over the last five years I contributed $29,500 to my retail super fund. The admin fees were $11,280 and I paid $15,183 in adviser fees, so after tax and insurance premiums were deducted I made no net contribution to super. There has to be something intrinsically wrong with such a system.
    – Name withheld.
  • I changed my investment option in September 2008 against the advice of a financial planner. In hindsight the planner was wrong and I did the right thing by converting to the cash option against the advice.
    – Rick, Victoria.
  • I retired during the downturn, having made the decision 12 months before, and was unable to reverse it. However, the situation has got worse, since I now see financial advisers are taking their fees out of the account. What gets me is their fees are the same no matter how successful or unsuccessful the investment.
    – Peter, Queensland.
  • A financial planner I approached for advice about super wanted to take fees of $3500 per annum to manage my modest account. Superannuation is far too complex to manage yourself and far too expensive to be guided by those in the industry.
    – Ann, Victoria.
  • The financial adviser did not want me to change over to cash. They failed to return my calls on three occasions over a period of four weeks. This was to arrange and confirm an appointment to speak with them and seek advice.
    – Max, ACT.
  • I was preparing to invest a considerable sum in my self-managed super fund prior to the current crisis. Suspicious of the sub-prime issues in the US and how they would affect global markets, I held off on investing for three months, against the advice of my financial adviser. I chose to invest in medium-term cash deposits and have not suffered the losses experienced by others.
    – Chris, NSW.
  • We were in a balanced option in August 2008 when we started our allocated pensions. We suggested to our adviser that we should take about half out of super to buy a home unit. We were advised not to do this. We lost about $60,000 before we changed to the cash option in November.
    – Geoff, Queensland.
  • At the end of November 2008 we invested a lump sum into super, on advice from a financial adviser. We’ve since lost $14,000 from the principal amount. Shouldn’t we have been advised differently? We’re 60 and this is all we have.
    – Susan, NSW.
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