Dan Miles
More than 5.2 million young Australians are missing out on higher superannuation returns by investing their retirement savings in default MySuper accounts, rather than investigating other investment options, according to an analysis of APRA data by Innova Asset Management[1].
The analysis reveals that an all-equities portfolio[2] spread across Australian shares and unhedged international shares outperformed the typical MySuper ‘balanced’ fund by 13.6 percentage points over the decade ended September 1, 2023, and by 16.8 percentage points over the multi-decade period from January 1, 1995, to September 30, 2023. It is important to note that data on MySuper offerings is not available back to 1995, so Innova developed a simulated model and ran it from 1995 to test the longer-term outcome.
Innova’s analysis of the APRA data reveals Australians under the age of 40 years hold more than 10 million MySuper accounts, so they typically face a 25 to 45-year investment time frame before their superannuation is accessible. It has compared their performance to an all-equities portfolio consisting of Australian and international shares.
Dan Miles, Innova Managing Director and Co-Chief Investment Officer, said: “MySuper funds which default to a ‘balanced’ type of portfolio typically were found to underperform an all-equities portfolio because insufficient risk was being taken given the time horizon of investors, many of whom can afford to take on more risk given their relatively young age.
“MySuper products were designed to cater for a largely disengaged customer base given superannuation’s distant payoff. Those least likely to be engaged – and so invest in default MySuper products – are young people with lower education, those on lower incomes and people with lower financial literacy. However, even younger Australians on higher incomes with relatively higher levels of retirement savings remain invested in lower-returning MySuper products,” said Mr Miles.
“The problem of being allocated to a superannuation offering that is not in line with an investor’s long-term goals is growing and suggests there is a great opportunity for financial advisers to expand into a younger client base to advise younger Australians on taking on higher equity risk investment options, which are more likely to deliver superior long-term returns,” said Mr Miles.
“This is another window into the ongoing issue of financial advice accessibility. Younger Australians who are by default investing in MySuper products would be better off with financial advice. This represents an opportunity for financial advisers to offer more affordable and scaled financial advice to young Australians.”
Innova’s analysis of the APRA data reveals that almost 250,000 Australians (or 233,000 people) aged 30 to 34 years hold between $100,000 and $499,999 in MySuper accounts. Meanwhile, more than half a million (597,000) Australians aged 35 to 39 years also have the same amount invested in MySuper accounts.[3] There are currently around 61 MySuper products which are intended as low-cost, simple products suitable for most investors. Most are balanced funds, with a static 70:30 growth-defensive asset portfolio allocation, though a small number are lifecycle funds, in which investors’ exposure to defensive assets increases as they approach retirement age.
“Younger investors will need to generate more wealth through superannuation to allow them a comfortable retirement income. While younger investors have the benefit of longer working lives and a rising superannuation guarantee, they will need stronger long-term returns,” said Mr Miles.
“Many currently rely on property to build wealth, but for many, especially younger investors, allocating to a property is out of reach as the cost to buy a property is too high. They would be financially better off investing more of their savings to assets such as equities – and importantly for superannuation, appropriate investment options.”
Household wealth in Australia rose 2.6 per cent in the June quarter 2023, to a record $15.1 trillion, up 3.9 per cent from a year ago. Property holdings drove the increase in household wealth in the third quarter and in recent years. Wealth per capita grew 2.1 per cent or $11,442 to $567,632 per person, data from the Australian Bureau of Statistics (ABS) reveal. Most household wealth is held in property; a total $10.3 trillion – or around 68 per cent of household wealth –was stored in property, compared with $3.6 trillion in superannuation. Australians held just $1.3 trillion directly in shares and $1.6 trillion in cash deposits.[4]
———-