The bounceback in superannuation pension funds, like accumulation funds, continued in the September quarter 2020, albeit at a less exuberant pace than in the June quarter.
Although funds have not quite recovered to levels prior to the steep COVID-linked sell-off in February this year, the positive momentum has continued in October and November. Sharemarkets tend to be forward looking and local shares have been buoyed by an easing of lockdown restrictions, optimism about progress towards a vaccine and unprecedented levels of economic stimulus in the October federal Budget.
The median pension Growth fund (with 61-80% growth assets) was up 2.3% in the September quarter following a 7.3% jump in the preceding June quarter. This trimmed the loss over the 12 months to September to -0.2%, largely on the back of the strong recovery in Australian and global shares.
As you would expect in the circumstances, the higher the level of growth assets the bigger the recovery over the three months to September and the bigger the deficit over 12 months. The median All Growth option was up 2.9% over the September quarter but still down -1.7% over the year to September. Conversely, fund members in the Conservative option (21-40% growth assets) enjoyed a positive median return of 1.4% for the quarter and 0.7% for the year to September.
While most retirees would have seen their account balance fall over the past year after withdrawing the mandated minimum pension income, the Government’s move to temporarily halve the minimum withdrawal would have softened the blow somewhat.
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.
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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 September 30, pension Growth funds returned 6.8% per year on average while accumulation Growth funds returned 6.14% a year.
However, when returns are negative pension funds typically generate slightly bigger losses than accumulation funds in the same category. Chant West senior research manager, Mano Mohankumar says this is because accumulation funds get a deferred tax benefit when returns are negative.
For example, pension All Growth funds with 96-100% growth assets returned -2.3% in the year to June 30, while the median All Growth fund in accumulation phase with a near identical investment portfolio returned a slightly smaller loss of -2.1%. But three months later, pension All Growth funds returned -1.7% in the year to September 30 compared with a slightly bigger loss of -1.8% for All Growth accumulation funds. For all other categories, pension returns were higher than the accumulation fund equivalent.
Mohankumar says although people tend to be more risk averse as they get older, most retirees are still invested in their fund’s Growth option where the majority of 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 their 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.
However, 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 and get closer to retirement.
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In years when shares and listed property perform poorly, retirees with a more conservative investment mix will do better than those with a higher exposure to growth assets. Over the long term though, the advantages 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 September 30.
Pension diversified fund performance (results to 30 September 2020)
|Fund category||Growth assets (%)||3 mths (%)||1 yr (%)||3 yrs (% per yr)||5 yrs (% per yr)||7 yrs (% per yr)||10 yrs (% per yr)||15 yrs (% per yr)|
Note: Performance is shown net of investment fees. It is before administration fees and adviser commissions.