Is Your Superannuation Fund Putting Your Retirement Savings at Risk?
Superannuation is a crucial aspect of retirement planning for Australians. It's a tax-effective way of saving money for your future, and it's designed to provide you with an income in retirement. However, not all superannuation funds are created equal, and some may put your retirement savings at risk.
Here are some potential risks to look out for:
One of the biggest risks of traditional superannuation funds is high fees. Many superannuation funds charge high fees, which can eat into your retirement savings over time. This is particularly concerning for people with low balances or those who are just starting to save for retirement.
Poor Investment Performance
Another risk of traditional superannuation funds is poor investment performance. Some funds may not perform as well as others, which can impact the value of your retirement savings over time. It's important to regularly review the performance of your superannuation fund to ensure it's meeting your expectations.
Lack of Flexibility
Traditional superannuation funds may also lack flexibility. For example, some funds may not allow you to choose your own investments, which can be a problem if you have specific investment goals or preferences. Additionally, some funds may not offer features such as the ability to make additional contributions or access your savings before retirement.
Insufficient Insurance Coverage
Superannuation funds often provide insurance coverage to their members, but the level of coverage may not be sufficient for everyone. If you have dependents or a high level of debt, you may need more insurance coverage than what is provided by your superannuation fund.
Governance and Compliance Issues
Finally, some traditional superannuation funds may have governance and compliance issues. This can include issues such as conflicts of interest, inadequate risk management, or breaches of regulations. These issues can impact the security of your retirement savings and may result in lower returns.
There are concerns over the valuation methodology used by Australian super fund managers in valuing their unlisted assets. Super funds have increased their exposure to unlisted assets such as infrastructure, private equity, commercial property, and venture capital and hedge funds.
Despite heavy losses on Wall Street in 2022, Australian super fund managers outperformed their market benchmarks, with the funds having heavy exposure to unlisted assets among the top performers. The valuation methodology used by super funds is not transparent, and they are accused of resorting to "extend and pretend" by turning a blind eye to the decline in the value of their investments in the hope that it will fix itself.
If super funds adopt the view that listed markets are no longer a good reflection of the true value of assets, it implicitly involves them taking the view that market conditions will eventually revert to the pre-pandemic period, when both inflation and interest rates were extremely low. This could lead to short-term performance results, and investors may become nervous about the inflated valuations of unlisted assets and start withdrawing money.
Many unlisted assets are valued using a discounted cash flow model, which involves projecting future earnings and then applying a discount rate. However, some super funds may be using an artificially low discount rate based on the average 10-year bond yield over a period of time, which could result in an artificially high valuation for the asset.
There may also be flawed assumptions used in valuing unlisted property, such as office blocks, and the need for super funds to take account of market valuations in coming up with a valuation for their unlisted assets.
The super funds with the heaviest exposure to unlisted assets are among the top performers in the industry, despite the fact that some of these assets typically carry heavy debt burdens and their valuations may tumble when borrowing costs rise. See this article and this article in the AFR for more information.
So, what can you do to mitigate these risks?
First, it's important to do your research and compare different superannuation funds before making a decision. Look for funds with lower fees, strong investment performance, and flexible features.
Second, regularly review the performance of your superannuation fund and consider switching to a different fund if necessary. This can help ensure your retirement savings are on track to meet your goals.
Third, consider seeking professional financial advice to help you make informed decisions about your superannuation and retirement planning.
In conclusion, while superannuation is an important part of retirement planning, it's crucial to be aware of the potential risks of traditional superannuation funds. By doing your research, regularly reviewing your fund's performance, and seeking professional advice, you can help mitigate these risks and ensure your retirement savings are secure.