Should super targets be lower?

Investment experts, including superannuation funds, are not considering the impact of the mounting global economic crisis when creating investment targets and forecasts, Rice Warner believes.

In an analysis, the research house questioned whether the last 10 years of positive returns for mainstream funds had made funds complacent even though the risk of a downturn was now much higher.

“The median estimates for Australian equities have varied from 7.6% to 8.2% a year over the next decade, which is a narrow range.  Hedged international equities have been slightly lower (higher taxes and no franking credits), with a similar narrow range of 7.0% to 7.7%,” it said.

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“Surprisingly, government bonds have also been in a narrow range (2.75% increasing to 3.5% in 2019 survey) and cash is flat at 3% to 3.3%, even though interest rates have moved considerably down over the last four years.”

It said these narrow ranges showed that investment experts were sticking to conventional forecasts of future performance and not building in global economic crises impact.

“Should funds be telling members that they are likely to average returns of 5% over the next decade, rather than the 7% to which members have become accustomed?” it said.

“Should the targets be reset lower in an environment of extremely high real asset prices and a decline in world growth (and future profitability)? Should we consider whether 10 years of ‘lower-for-longer’ has expanded to permanently lower interest rates, and a different normal state?”

Rice Warner said baby-boomers who were gradually transitioning into retirement would be the most affected. While retirees now were drawing the minimum pension of 5% up to age 75 when their fund was earning 7%, this would not be the case for those retiring now.

“Fund communications, including retirement calculators, need to show the impact of potentially worse outcomes relative to the past.  Consequently, more members will need to draw down their capital earlier,” it said.

Rice Warner noted that super funds needed to prepare members for much lower nominal returns in a low interest rate and inflation environment and tolerating higher levels of volatility if they were to have a reasonable change of achieving adequate long-term returns.

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