When SmartCompany published its inaugural Australia’s best super fund feature in November 2007, the worlds of superannuation and investment were very different.
The Australian sharemarket was then near its all-time, pre-GFC high, Lehman Brothers was 10 months from collapse and Australia’s superannuation laws permitted huge concessional (tax-deductible) annual contributions by older members.
And fund members had become accustomed to high double-digit annual returns. (Australia’s top performing at the time, Catholic Super, had returned almost 20% in the 12 months to September 2007.)
How things have changed.
As this year’s best super fund feature – the sixth in this unique series – is being published, super fund researcher SuperRatings reports that balanced super funds have returned an average of just 0.2% a year over the past five years.
And the maximum concessional contribution allowable in 2012-13 for members over 50 is a quarter of what it was five years ago. This contribution cutback turns upside down the strategy of waiting until the final decade or so before retirement to really build-up retirement savings.
Given the different investment environment and the more restrictive super laws, your incentive to choose the best super fund at the best possible price has never been more powerful.
Here are our tips for picking the best fund for your circumstances:
1. Look at award winners
A straightforward way to identify a top all-round super fund in terms of performance, fees and services is to look at the award winners.
SuperRatings compared more than 450 super funds to this month name the $17-plus billion industry fund Sunsuper as its fund of the year, providing the best value for money in the accumulation and pension phases.
Nathan McPhee, chief executive of SuperRatings, says “very, very little” separates the best funds for both accumulation and pensions.
SuperRatings named Australia’s biggest industry fund, AustralianSuper, as the top fund for accumulating super savings. Six of the other finalists in the accumulation category are also public-offer industry funds – AUSCOAL Super, CareSuper, Catholic Super, HESTA Super, HOSTPLUS and Sunsuper. The remaining finalists are Australia’s largest corporate fund, Telstra Super, and two public-sector funds, LGsuper and QSuper.
And, as later discussed, HOSTPLUS Pension was named as super pension of the year.
2. Know the funds the experts favour
Most professional superannuation analysts would agree, at least off-the-record, that a solidly-performing, low-cost industry, corporate or government super fund is probably the most appropriate choice for most fund members – for both the saving and retirement phases.
Interestingly, at least one super fund research firm picked a giant industry fund as the default fund for its employees who had not made a choice of fund. (By contrast, all of SuperRatings’ employees exercise their right to choose a fund. They are members of a broad selection of industry and retail funds.)
Apart from offering a reasonable range of investment options, industry funds have managed to historically outperform commercial master trusts – at least over much of the past decade.
Super fund researcher Chant West reports that the growth investment options of industry funds – which it classifies as funds having 61% to 80% of their portfolios in growth assets – have outperformed commercial master trusts over the medium and long term.
In the 12 months to September, industry funds have outperformed master trusts over three-year, five-year, seven-year and 10-year periods. But over the past year, master trusts have outperformed industry funds, producing an average return of 11.6% against 10.3% by industry funds.
These returns are after-tax and after investment management charges. Significantly, the returns for commercial master trusts recorded by Chant West do not include any adviser commissions where payable.
As Chant West director Warren Chant explains, shares are the main driver of performance in growth funds (commonly known as “balanced funds” by other research firms). And with their lower exposure to shares, industry funds have tended to outperform master trusts when share markets are flat or falling. However, when share markets are rising, Chant West investment research director Mano Mohankumar, expects master trusts to outperform.
3. Consider investing in a few top funds
A superannuation analyst told SmartCompany a few years ago that he was a member of about six super funds. He picks the best features of different funds to put together what he believes is the best line-up for his circumstances.
Fund members are often advised by their own super funds and by the likes of ASIC to consolidate their super savings into a single fund to save costs. While this suggestion may be appropriate for members with low balances, many members would gain comfort and perhaps increase their opportunities by spreading their super between a few funds.
The most common duplicated costs for being in more than one super fund are fix-dollar fund administration fees of perhaps $52-$78 a year. Most charges borne by a member are for investment management based on a percentage of your superannuation assets – so this cost doesn’t change with the number of funds. (Keep a close watch, however, on any financial planning charges that may be incorporated in a commercial fund’s fees.)
Perhaps the main drawback of having multiple funds is the task of keeping track of their performance, costs and asset allocation. A fundamental principle of sound investment practice is to ensure that your overall investment portfolio is appropriately diversified for risk and returns.
Nathan McPhee of SuperRatings is a member of two super funds, a retail master trust and an industry fund. “I use my retail master trust to invest in opportunities that are unavailable on other platforms,” he explains. “It is a very high-risk portfolio but it is appropriate for me at my stage.”
Through the master trust, McPhee invests in boutique fund managers specialising in small companies, resources and infrastructure.
His superannuation guarantee contributions are directed into the default option of an industry fund, which provides excellent death and income-protection insurance. And perhaps once a year, McPhee transfers some of the industry fund’s balance into his retail master trust.
4. Choose the best of the best
Depending upon their personal circumstances, members who are thinking about spreading their super between different super funds might choose:
- One fund to provide access to the most suitable and competitive insurance cover.
- A second fund to hold direct shares and a choice of investment funds.
- A third fund to gain access to a low-cost, strongly performing balanced portfolio.
“We would say that insurance would be your first reason to shop around for another super fund,” says McPhee. “Perhaps you can’t get a good deal with your current fund or perhaps you want to double up [your insurance cover by joining a second fund].”
As McPhee explains, almost every super fund offers death, total and permanent disability and income-protection cover. “But outside cost, it is the amount of automatic acceptance available [without a medical examination] that matters most. There is a huge variation.”
Another consideration is the waiting period for income protection cover. Most funds offer 30, 60 and 90-day waiting periods. “Clearly, a member’s waiting period for income protection should be aligned with their sick-leave provisions with their employment,” he says. “There is no point in having a 30-day waiting period if you have three months’ sick leave.” A longer waiting period should mean lower premiums.
Which funds offer the best insurance deals? The best insurance cover for a particular member can depend on the member’s circumstances. And it can really pay to shop around.
McPhee says, for example, that Intrust Super – a small industry fund specialising in hospitality, tourism and retail workers – offers innovative insurance cover. For instance, Intrust has a waiting period for income protection insurance of just 21 days – highly appropriate for members without sick leave. And a loyalty scheme can eliminate the waiting period.
Further, Intrust’s income-protect insurance covers 99% of a member’s salary – most funds cover 75% or 85% of salary.
Other funds ranking highly for their overall insurance cover, says McPhee, include NGS Super, AustralianSuper, Sunsuper and Australian Catholic Superannuation Retirement Fund.
Some funds allow members to have very large death/disability insurance cover without a medical examination. AustralianSuper allows members receiving employer contributions to have up to $1.5 million or 10 times salary without a medical. And for CareSuper, the cap without a medical is up to 10 times salary to a maximum of $1.55 million.
One strategy is to hold at least a small amount in a fund with an excellent insurance coverage.
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