Future-proof your super

Is your superannuation protected against another GFC?

Don't leave yourself out on a limb

Did your superannuation go along for the ride when the S&P ASX 200 fell 40% between March 2008 and 2009? Huge risks were taken with other people's money during the Global Financial Crisis (GFC) - and that made many of us a lot poorer.

Super accounts are well on the road to recovery, but for fund members who were in the "retirement risk zone" - about five years before or after retirement - the GFC was especially damaging.

Why? Because of what appears to be a fundamental flaw in the superannuation system. Instead of reducing risk as an investor approached retirement age, most super accounts remained overly exposed to the unpredictable share markets.

Unless you've taken steps to change your asset allocation, this hasn't changed.

Where is your money invested?

Jeremy Cooper, who headed the 2009-2010 superannuation study (known as the Cooper Review) on behalf of the government, told CHOICE that having close to 70% of your assets in shares when you're looking to retire is unacceptably risky.

And the facts seem to bear this out.

  • Australian super funds were the third-worst performing retirement funds among more than 30 OECD member countries from 2008 to 2010. Only Portugal and Estonia fared worse.
  • Australian super funds had the highest exposure to share markets among all OECD countries during the GFC and, even now, very few Australian super funds significantly reduce exposure to the share markets while shifting from accumulation to the drawdown/pension phase. The average proportion invested in equities drops from about 74% to 67%.
  • Many retirees roll their superannuation into account-based pension plans, and account holders must withdraw a certain amount every year to comply with government rules. However, because retirees were faced with the prospect of selling assets worth a lot less than when they were purchased during and after the GFC, Canberra stepped in to decrease the amount that must be withdrawn – a tacit acknowledgement that retirees' super accounts were over-weighted in shares.

Learning new tricks

Keeping accounts in accumulation mode right up until retirement was probably a good idea given the impressive gains in the capital markets from the early 1980s up until the beginning of the GFC in late 2007. But Cooper points out that Australia needs to adjust to the new reality of global volatility.

Switching to a safer portfolio in mid-crisis doesn't work, Cooper says. "You're just cementing your problems if you switch the balance of your account to fixed-interest products once the losses have been realised."

Such a move would hobble your account's earning power at the wrong time. And with retirees using up to four or five per cent of the account annually, usually without any money coming in, exiting the share market mid-crisis would make a bad situation worse.

The damage done by the GFC

The Australian economy as a whole fared much better through the GFC than the economies of other developed countries, but at the height of the crisis Australian shareholders were hurt just as badly as shareholders in the US, UK, Japan, Germany and France.

A couple of key stats:

  • $160 billion – The drop in total Australian superannuation fund assets between December 2007 and June 2009.
  • 120% – The amount of income Australians aged 59 in 2009 needed to contribute to their super to make up for GFC losses by age 60. The current mandatory employer contribution is 9.25%.

The lingering GFC hangover

The impact on super accounts during the GFC depended on how exposed they were to the share markets.

The average loss for what are generally referred to as "balanced" funds – where the vast majority of super money is held – was 17.5% between March 2008 and 2009.

According to a paper from the Centre for Pensions and Superannuation at the University of NSW, the maths isn't pretty:

  • Workers aged between 30 and 40 would have needed to save as much as two per cent above the mandatory 9.25% every year until retirement to make up for the losses that occurred between 2007 and 2009.
  • A retirement saver aged 49 before the crisis would need to contribute almost 19% of earnings each year, or more than double the mandatory rate, between the ages of 51 and 60 to catch up.
  • If you were 55 you would need to contribute about 34% of earnings each year between the ages of 57 and 60 to catch up.
  • Baby boomers would have had to either increase their contribution rate or delay retirement to make up for their losses.

Protecting your super

Cooper's message to Australians in the retirement risk zone is to consider moving more assets into fixed-interest investments that return, say, six per cent a year instead of the eight or nine per cent the share markets can offer when times are good.

  • Playing it safe means re-allocating toward fixed-interest products such as bonds or term deposits. But switching may not be easy when you're more or less bound to what the fund manager is doing. Talk to a trusted financial adviser.
  • It's always a good time to protect your superannuation assets, not just when the share markets appear to be on the brink of meltdown.
  • Super fund members of any age can benefit from parking their money in safer havens during risky times, but such a move requires a hands-on approach. At a minimum, review the level of risk in your account and discuss safer options with your fund manager, whether or not you decide it's time to reduce risk.

If super accounts are designed as they should be, Cooper says, "you will be automatically de-risked when you reach the retirement risk zone".