Superannuation is something millions of Australians have, but where you choose to invest it is a decision that is often guided by the size of the returns the fund may be able to generate for your future. But do we stop to consider what factors might influence the size of that return?
You’ll often hear it said that all superannuation funds are the same. We beg to differ, for a couple of reasons, and it’s important that people who are saving for their retirements understand what they are.
Many super funds will tell you that they exist to help their members achieve their best possible retirement outcomes. Of course, you might say, well, they’re super funds – that’s what they do.
But what fund members may not know is that some super funds – such as retail funds like BT, MLC, Colonial First State, and OnePath, are owned by the big four banks, which pay dividends to their shareholders from their profits, which are often measured in billions.
That’s good, if you’re an investor – as many industry fund members are, indirectly, through the bank shares held by their superannuation funds. Perhaps not so good if you’re a member.
“We’re here for the member/client/customer”
Industry funds are “profit-for-member” (NOT “not-for profit”). They want to make a profit and distribute all of it to their members.
They don’t have to make choices about whose interests they look after first, because industry funds only exist to look after the interests of their members.
This is a key difference – all the money industry funds earn through investing members’ money is returned to those members. This means better returns for them, and more money in their pockets when they begin their retirement.
“Superannuation is a good investment.”
“No, superannuation is a bad investment.”
Trying to rate superannuation as good or bad – it’s as futile as saying literature, or sport, is good or bad. There are good super funds, and super funds that aren’t so good. And perhaps what matters more to your retirement than any other single factor is your fund’s long term performance.
The past three years have been good ones for members of many superannuation funds. Australia’s biggest super fund, AustralianSuper, has just returned its third consecutive year of double-digit growth.
AustralianSuper’s Balanced Option (where most members have their money) delivered a return of 10.86% last financial year, 13.88% in 2013/14, and 15.63% in 2012-13.
But to gain a more complete picture, let’s look at the long-term performance of three super funds: in our theoretical example*, one fund returns an average of 7% a year after fees and costs. Another fund returns 6.5% a year, and a third fund returns 5% a year.
The annual returns don’t seem very different from each other, but over a working life of 42 years, they add up to a yawning gap. A member of the first fund, returning on average 7%, will accumulate $444,700 by retirement. A member of the second fund, returning 6.5%, will retire with $393,100. A member of the third fund, returning 5% a year, will end his working life with just $279,600 – more than $165,000 less than if he’d invested his money in the first fund.
This is why it’s important to understand which institutions are standing up for their members… and which are putting the interests of their shareholders first.
So what are the big questions you should ask of your super fund, and how can you investigate if your funds are invested with a large company for which you have no personal contact?
- Go to the super fund’s website and seek out details of the fund you are invested in. You should be able to read about the costs of investing in the fund. Compare the costs and fees you’re paying with those charged by industry super funds.
- Look for the parent company details. This can provide you with an insight into “who they serve” – whether it is member or shareholder – or whether they are walking the tightrope of both.
- Visit the parent company website and read their “About Us” page seeking insight into how they are aligned with their members.
* Source: Internal AustralianSuper calculations. Member aged 25 at 30 June 2015, retiring at age 67, Account balance at age 25 = $5,000, Salary at age 25 = $50,000, assumed to increase yearly at 3.5% pa, Employer contributions are 9.5% initially, rising to 12% in line with legislated increases, Investment returns after fees and taxes are 7%pa (Fund 1), 6.5%pa (Fund2) and 5.0%pa (Fund 3). Assume AustralianSuper admin fees of $1.50 per member per week for both Funds, The account balance at age 67 is shown in today’s dollars by discounting at 3.5% pa.
This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788. The views expressed are those of Starts at Sixty and not necessarily Australian Super. Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns. The case study is provided for illustration purposes only and is not a representation of the actual benefits received or fees and costs that may be incurred. For more information, please visit the AustralianSuper website.