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For many reasons, the focus of our superannuation system – from the media, government and super funds themselves – has been on the accumulation phase.
We applaud and award the funds that deliver the best returns for members as if it’s a race past the post; the post being the day you retire and count your winnings. But that’s just the beginning.
While building your nest egg is important, the real challenge begins once you start drawing on it to pay for your living expenses when you are no longer working. You want your money to last the distance and be invested in a way that gives you peace of mind.
That’s why your choice of pension fund is so important; because there are real differences in the strategies, products and services on offer.
What makes a winning pension fund?
As Ian Fryer, general manager of superannuation ratings group Chant West, explains in the video below, there are two areas where pension funds need to deliver for their members.
The first is investments with returns that will keep your money growing even as you withdraw income, while recognising the importance of capital preservation for retirees. That’s different to accumulation phase, where the emphasis is squarely on growth.
The second is financial advice, because everyone’s needs in retirement will be different. When you move from accumulation phase to retirement phase, advice that is tailored to your personal circumstances is critical. One you have retired you may just want to touch base occasionally to see how you are tracking.
The Pension Fund of the Year for 2021 was UniSuper.
When we think about pension, the two big areas are really investments, clearly that’s where you need to generate the returns so that your money keeps growing even while you’re drawing it down. The other area is member services, but in pension, that really is more to do with advice. As you’re in the accumulation phase, there’s certain strategies that most people could use. But as you get to the pension phase, people’s needs are much more personal. Everyone’s going to need something a bit different, which is where financial advice is really critical.
UniSuper is very strong on both investments and advice. On the investment side they have a very experienced investment team that has seen a whole range of different investment scenarios over the years. They have a lot of skill, especially in listed markets, and they make a lot of their money for members from listed markets that they know well. Both Australian shares and also international shares.
One of the advantages of UniSuper for pension members is it’s quite liquid. There’s not a lot of money set aside in unlisted assets, which is probably a good thing when you’re in pension phase where a lot of members are going to be drawing down their money and you’re not having a fund grow very quickly like accumulation but you’re having a fund which which may well be decreasing over time because people are taking their money out.
In terms of the advice piece, UniSuper probably has the strongest offering in terms of the full service advice through super funds. UniSuper has a big advantage. They have their members who are primarily at universities. So UniSuper can put their advisers, whether it’s providing just basic advice or comprehensive advice, they can actually put them in those universities to help members where they’re at. That is a huge advantage that most other funds can’t do. However, UniSuper can. They have a big advantage in this area, and they take advantage of it and have a great model that can provide members with pretty much all their advice needs.
So when a UniSuper member gets to retirement, they can think, ‘OK, what do I need? Well, I need some assistance.’ And their UniSuper adviser can help them. UniSuper members who move from super to pension, the vast majority, about three quarters of them get some sort of advice when they move from super to pension. And as we talked about before, at least at the time of moving from super to pension, that advice is really critical. So a member can set up their pension and they can set up all their all their affairs at retirement in a way that’s going to be the best for them.
The other two funds in the top three for pension were Aware Super and QSuper.
So Aware Super is a fund which has really grown strongly over the past few years, and in our view has improved a lot in terms of outcomes to members. One of the things that Aware Super does really well is it doesn’t just say ‘here’s your accumulation options and you get the same options in pension’. What it does is it says ‘If you’re in pension, you’re going to have different needs. So we’ll have different investment options. We’ll invest in Australian shares in a different way and international shares in a different way in pension.’
We see that there probably should be more superannuation funds moving down this path, recognising that when you’re increasing your balance in accumulation, you’re strongly focused on growth. When your balance is going down in retirement, then you’re more sensitive to capital protection issues. So we think Aware Super gets the balance there right away.
Aware Super also is really strong in the advice space. Aware Super has probably more advisers, well definitely more advisers than any other not for profit fund. There’s about 180 advisers around the country and they’re providing a range of advice – either simple advice or full service advice. And indeed they’re moving from a model where it’s the traditional fee per year for advisers to be more transactional. ‘So what do you need help with? You need help with this. We’ll provide you with this help now and come back when you want an update or when you need some more help.’
The final fund in the top three for pension is QSuper.
QSuper has had an investment model for a number of years that has focused on listed equities, that has focused on unlisted assets, but also fixed interest, but fixed interest in a way that’s quite different to other funds. What they do with fixed interest is they say, let’s invest in a way in fixed interest, which is actually more risky than the way that other funds invest. That is, we’ll invest with a longer duration. Our fixed interest is going to be over 15 years rather than six or seven years, which other funds might have.
What that means is that QSuper can get a better return from their fixed interest over most periods, but with a bit more risk. What that has meant is that the risk of fixed interest and the risk of shares, while they’re both risky, long term fixed interest and shares, while they’re both risky, they’re risky at different times. So when shares goes down, generally fixed interest goes up and vice versa. The result of all that for QSuper members has been a much smoother ride over times of market volatility. And that’s really good for a member who’s in retirement.
The other thing that QSuper does is in terms of advice, their advice model, not so much focusing now on the comprehensive advice, but on simple advice, but also targeted advice when members move from super to pension, helping them set up a retirement plan. And there’s now a new and a strong program to cover all members needs there. It’s not going to answer every question in retirement, but will help them with setting up a pension product within the QSuper world.
And the final thing that QSuper does is, QSuper has what’s called a longevity product. So a QSuper lifetime pension, which is a product that rather than taking money out each year, like you do for an account based pension and being worried about running out. In QSuper’s lifetime pension, you can take out the same amount each year and know that you can take that out all the way to when you pass away. So you’re not going to outlive your money in this particular product.
Indeed QSuper won the Innovation award for their lifetime pension product. The best thing that it does for members in retirement is it says, rather than you just taking the minimum amount that you can take for your pension, which is what the majority of people do because they’re afraid that their money is going to run out. It gives them more comfort to take maybe an extra 50%, maybe more, knowing that this is going to last for the rest of my life.
This innovation is going to mean that members have the confidence to take more money out so they can have a better standard of living. And their standard of living in retirement is not based on this possibility that I might live to be 100, 110.
The other good thing about QSuper lifetime pension is the way it’s invested. So if you invest in a standard annuity, then that money is going to be mainly invested in sort of cash and fixed interest. A large amount of fixed interest. Fixed interest isn’t going to provide you a great return over the next few years. So QSuper’s lifetime pension is invested partly in growth assets, and they’ve got a target there of return of 5% per year. So when you start, you put your money in and you’re told you’re going to get a certain amount of income per year.
And what happens is if the return for the year is greater than 5%, then your income for that year in all future years goes up by that differential. If the returns are less than 5%, then it goes down by that amount. So over time, you actually do get the benefit of strong markets so that your income may well go up over time. You’re not guaranteed that you’re going to get the same amount each year. If markets go down, then your balance will go down. But there is strong potential on the upside.
But the biggest strength of this product is members know that they will get their income for the rest of their lives and they can with confidence say ‘I’ll draw this amount down. And I know that I’ll get this amount adjusted for investment returns, of course, for the rest of my life.’ There won’t come a time where you’ve run down your money and there’s nothing left.
We see that this is a pattern for many other super funds to start up similar similar retirement products. And we expect over the next 12 to 18 months, several other funds will go down this path as well. I think QSuper has done a great job about leading the way and we expect a whole bunch of other funds now to fall in behind them.
The best pension funds offer a range of advice, from basic to comprehensive. But Fryer argues there’s a lot more funds can do to support pension members to get the most out of their retirement savings. From tools that help them make good decisions to products that give them confidence to withdraw more cash without worrying that their savings will run out.
So over time, superannuation funds have put a lot of resources into helping members in accumulation. Into helping them understand, often at a member-by-member level, what they can do to grow their super, what they can do to target a retirement income that’s going to work for them. Unfortunately, super funds haven’t done as much work in terms of helping pension members with understanding how long their money is going to last, with providing calculators, with providing a whole range of support so that members can understand. ‘Here’s where I’m at at the moment. What decisions can I make that’s going to, one, affect my income for the rest of my life, but also how long it’s going to last for?’
We’d like to see funds put as much resources as they do for their accumulation members in helping them navigate their choices. We’d like to see them put that effort into helping pension fund members, showing them the areas where they can choose and helping them make good decisions.
Advice is a big part of that. We’re starting to see some digital advice offerings which can be used both in the accumulation space but also in the pension space. We’d like to see a stronger focus of those in the pension space so that there can be some self-service tools so that members, for example, can keep track how they’re going to their retirement goals. They might have got advice from an adviser when they’re retired. And they just want to keep track each year. ‘How am I tracking? Is my money going to last as long as I thought?’
That’s really important that as this wave of members move from super to pension, that we provide sufficient support for those members to either, number one, self serve, help themselves or number two, get advice. One of the issues in the retirement space is the needs of each member in the pension phase is quite different. And we need to be able to provide services and help to help members understand what is the best course of action for them.
A key area to look at in retirement products is how your retirement product fits in with the Age Pension. The income that you get from your retirement product is going to impact how much you get from the Age Pension. So a bunch of funds, most funds would have some sort of a calculator to help members understand that. Most funds would have some information on their website to help members understand that. Most funds would have some advice service. However, we believe that funds could be doing more in this space as we’ve seen with many funds, the focus can tend to be on the accumulation space rather than providing these services in the pension space.
Another really helpful part, of QSuper’s lifetime pension is how it is treated for the Age Pension asset test. If you look at an account based pension, you’ve got a certain amount of money in your account based pension that will be assessed fully 100% for the assets test. If you have money in QSuper lifetime pension, only 60% of that will be assessed for the assets test. So if you’re looking at having the same amount of money in an account based pension versus having the same amount of money in the lifetime pension, then for anyone who is in that part pension space, you will be you’ll be getting more Age Pension with having at least some of your money in QSuper lifetime pension.
We often talk about the main award being the super fund of the year. But to be honest, where the future is heading is the Pension Fund of the Year. In a few years time, we will have getting close to a third of all money in pension products and indeed pension products is where the rubber hits the road. The whole system is not built just so that members can grow an accumulation of assets. It’s actually so that members can draw down that money in retirement so that that can pay for their living expenses when they’re no longer working.
So we believe that the focus in the future will really be on those pension products. So from our point of view, the Pension Fund of the Year is just as important as the Super Fund of the Year, and indeed in the future may become more so.
One of the great things about pension as well is there’s actually more things that you can do differently in pension. There’s more levers that funds can pull in the way they help members and indeed the way that they invest, maybe being different to super. So we’re hoping that we’ll actually see more differentiation in the way that pension funds are run compared to what we see in super funds.
Pension funds of the year
The table below lists the best pension funds for the past five years as awarded by Chant West and SuperRatings. SuperRatings announced its 2021 winner in late 2020 while the Chant West awards were held in May 2021.
As you can see, the pension fund plaudits over the past five years have all gone to industry funds. Not only that, but two funds – UniSuper and QSuper – are out and out champions in this space.
Fryer says UniSuper is very strong on both investments and advice. One of its big advantages is that members are clustered on university campuses, which makes it easier to offer face-to-face financial advice. Around three quarters of members seek advice as they prepare to retire.
QSuper, which won SuperRatings’ top gong for 2021 and was also in Chant West’s top 3 finalists, has a unique investment model.
Along with listed shares and unlisted assets, QSuper has a high allocation to long duration bonds that provide higher returns than traditional fixed interest investments, albeit with slightly higher risk. But as the returns from shares and long bonds are not correlated, that is, they hit their highs and lows at different times, the combination produces a smoother ride for members. This is important for retirees who want a regular flow of income.
QSuper also has an innovative lifetime pension that allows members to take out the same amount of money each year until they die, so they can be confident that their money won’t run out. Another advantage is that only 60% of the money in a lifetime pension account is counted towards the Age Pension assets test, unlike other pension accounts where 100% of your balance is assessed.
Choosing a pension fund that offers the best retirement outcome for your personal circumstances and preferences is every bit as important as choosing the right super fund, perhaps more so.
The annual Pension Fund awards are a great way to check what the best funds are doing right at a particular point in time, but your search shouldn’t end there. Over the next few years, more funds are expected to launch innovative pension products, so when retirement beckons it’s important to compare pension funds.