Despite challenging economic conditions, superannuation pension funds roared back to life in the calendar year to December 2023, with the median Growth fund (61–80% growth assets) up 10.8%.
Against a backdrop of rising inflation and aggressive rate hikes earlier in the year, and escalating geopolitical tensions in the Middle East, shares proved remarkably resilient. International shares surged 23% over the year on the back of the tech sector, while Australian shares returned a healthy 12.1%.
And in good news for more conservatively invested retirees, cash had its strongest year in a decade with a return of 3.9%, while bonds also rebounded strongly late in the year. Australian and international bonds returned 5.1% and 5.3% respectively.
Not only did the latest annual result wipe out the previous year’s 5.1% loss, it was the 11th positive return in the past 12 years and the 26th positive return in the 31-year history of compulsory super. Super is a long-term investment and, as you can see in the table below, pension fund returns are overwhelmingly positive over all timeframes from three to 15 years.
Last year’s positive returns mean most retirees would have seen their account balance increase even after withdrawing the mandated minimum pension income. The government’s move to temporarily halve the minimum withdrawal would have helped protect account balances in rocky patches in recent years, although standard minimum withdrawal rates have been reinstated for the 2023–24 financial year onwards.
Pension fund categories – Conservative, Balanced, Growth, High Growth and All Growth – are the same as those for accumulation funds and by and large hold the same underlying investments. So, pension fund returns are driven by the same factors as accumulation fund returns.
Yet despite holding the same underlying investments, pension fund returns tend to be roughly 10–15% higher than returns for the same category in accumulation phase over the long run. The difference is due largely to tax, as investment earnings are not taxed in retirement phase.
For example, in the 15 years to 31 December, the median return for pension Growth funds was 10.8% per year on average while accumulation Growth funds returned 9.9% per year.
However, when returns are negative pension funds typically generate slightly bigger losses in the short term than accumulation funds in the same category. For example, in the year to 31 December 2022 the median return for pension Growth funds was -5.1%, compared with -4.6% for the accumulation equivalent. Only Conservative pension options posted a smaller loss (-2.8%) than their accumulation equivalent (-2.9%).
Chant West senior research manager Mano Mohankumar says this is because accumulation funds get a deferred tax benefit when returns are negative.
Although people tend to be more risk averse as they get older, he says most retirees are still invested in their fund’s Growth option where most accumulation members are also invested. For example, he says that in large industry funds, such as AustralianSuper and UniSuper, most pension fund members are in the Balanced option (with an investment mix that aligns with Chant West’s Growth category). Even so, he says a meaningful number would also be invested in the next risk category down, in line with Chant West’s Balanced category with 41–60% growth assets.
Retirees in retail pension funds (and some industry pension funds) are most likely to be invested in a Lifecycle investment option with a conservative investment mix. Lifecycle funds automatically shift members into a lower risk investment mix as they age.
In years when shares and listed property perform poorly, as they did in calendar 2022, retirees with a more conservative investment mix will do better than those with a higher exposure to growth assets. The reverse also holds true, as retirees with more exposure to growth assets did best in the year to December 2023 when shares rebounded strongly. Stout-hearted retirees invested in the median All Growth option pocketed a return of 15% for the year. Over the long term, though, the advantage of holding a meaningful level of growth assets is clear, as can be seen in the table below.
The following table from Chant West shows pension fund performance across various timeframes for five investment categories as at the end of December 2023.