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Superannuation pension funds delivered stellar returns to retirees in the year to June 2021, with the median Growth fund (61–80% growth assets) up a remarkable 20.1%.
Few would have believed this was possible a year ago, when the median pension Growth fund returned a negative 0.4% for the year to June 2020.
Following the steep COVID-19 sell-off in February/March last year, all investment categories from Conservative (21–40% growth assets) to All Growth rebounded strongly. The median conservative option was up 8.9% over the year while the median All Growth option was up a blistering 29.7%.
This means many retirees would have seen their account balance grow strongly over the past year even after withdrawing the mandated minimum pension income. The government’s move to temporarily halve the minimum withdrawal would also have helped protect account balances, even for members invested in the most conservative options.
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.
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 30 June, pension Growth funds returned 7.3% per year on average while accumulation Growth funds returned 6.5% a year. Over the past year, pension fund returns were between 1% (Conservative options) and 3% (All Growth options) higher than their accumulation fund equivalents.
However, when returns are negative pension funds typically generate slightly bigger losses in the short term 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.
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.
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.
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 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 June 2021.
Pension diversified fund performance (results to 30 June 2021)
| Fund category | Growth assets (%) | 1 mth (%) | qtr (%) | 1 yr (% pa) | 2 yrs (%) | 3 yrs (% pa) | 5 yrs (% pa) | 7 yrs (% pa) | 10 yrs (% pa) | 15 yrs (% pa) |
|---|---|---|---|---|---|---|---|---|---|---|
| All Growth | 96–100 | 2.6 | 7.9 | 29.7 | 12.6 | 11.1 | 12.4 | 10.8 | 11.4 | 7.8 |
| High Growth | 81–95 | 2.4 | 6.9 | 25.3 | 11.2 | 10.2 | 11.5 | 10.3 | 10.9 | 7.8 |
| Growth | 61–80 | 2.1 | 5.6 | 20.1 | 9.7 | 8.9 | 9.7 | 9.1 | 9.7 | 7.3 |
| Balanced | 41–60 | 1.5 | 4.5 | 14.5 | 7.1 | 7.1 | 7.7 | 7.4 | 7.9 | 6.5 |
| Conservative | 21–40 | 1.0 | 2.9 | 8.9 | 5.0 | 5.4 | 5.6 | 5.7 | 6.5 | 5.8 |
Note: Performance is shown net of investment fees. It is before administration fees and adviser commissions.
