Yes, your super has taken a hit, but now is not the time to disrupt it

In an unstable financial market, you’re better off leaving your superannuation alone. This is why.

Covid-19 has brought with it a level of financial stress not seen since the global financial crisis (GFC). Households facing income and job losses may look to government measures for support, including new rules for early release of superannuation. But while this might alleviate some pressure now, experts say leaving your super untouched is likely to be your best strategy.

Australia is one of only five advanced economies in the world with a pool of long-term superannuation or pension savings that exceeds the size of its GDP. Australian employers pay super into nominated accounts, where it grows through investments that funds make using combined member contributions. The more stable the pool, the more valuable the investments will be over time.

Super is, by design, a long-term investment strategy. It’s carefully planned to ride out the inevitable crests and falls of financial markets, making choices that will benefit members for decades to come. While economies may tumble, super is always looking to the future.

Industry Super Australia’s deputy CEO, Matthew Linden, says it’s important to understand how funds stay steady during periods of uncertainty. “People may think the super funds themselves will opportunistically shift money around, sell assets and get cash, but they don’t,” he says. “Churning assets is costly and inefficient. Funds are able to deliver better long-term returns by sticking to a very considered investment strategy, which at its heart involves a lot of diversification. That protects members’ savings and ensures they get the benefits of the rebound when it inevitably occurs.”

Industry and not-for-profit super funds invest in a range of equities. Listed assets, such as those on the ASX, are part of the mix, but they also buy unlisted assets including infrastructure, property and private equity. While listed assets move with the market, others, such as roads, ports, renewable energy, government-leased buildings, and water treatment, are far less affected by economic instability.

“If you watch the nightly news and see what’s going on in the stock markets, it doesn’t necessarily reflect what’s happening with superannuation,” Linden says. “Activity in the stock market in Australia and overseas is only part of the total investment portfolio.” That means your retirement savings are unlikely to trace market falls. Most members are invested in diversified balanced investment options. When you first sign up as a super fund member, this is usually the way your money will be invested - and with good reason. Diverse investments are chosen to create a stable, long-term portfolio that will last the distance.

“A lot of work goes into constructing these balanced investment options,” Linden says. “People should have confidence that even if they haven’t engaged deeply in their super, they will actually be invested in options that are very carefully and cleverly designed.”

Making diverse investments with a collective pool of money gives super enormous leverage. Unlike cash and other short-term portfolios, superannuation is able to make large-scale investments and manage them directly, cutting out the middleman. Just like buying in bulk, when funds invest on behalf of all members, they get more for their money. “That means fees are lower and there’s long-term exposure to high-quality asset classes with a medium-to-long-term investment horizon,” Linden says. “Members get better diversification, and there’s less cost involved as well.” During a financial crisis, when it’s difficult to drive strong returns, it’s even more important that funds can continue to make the most of their significant buying power.

Super funds can deliver higher returns at lower risk than individuals can alone. “If we look over the long term for industry funds, for instance,” Linden says, “they have been able to generate — after fees and tax — returns of more than 7% per annum. The Productivity Commission’s inquiry into superannuation found that over someone’s working life, just a couple of percentage points could represent close to half a million dollars. It’s tremendously impactful.”

But when super is disrupted — for example, by members switching their investments or pulling money out — funds are forced to behave differently. Being made to convert assets to cash means they operate more like a bank, converting high-quality assets into simple cash, and undermining long-term investment strategies.

“Funds end up selling into falling markets,” Linden says. “Potentially it can exacerbate the extent of the fall and crystallise losses, which harms all members.”

Knowing that super funds offer a stable, long-term and diverse investment, the best way to avoid these losses is to stay the course. And Linden says there’s plenty of reason to feel optimistic about the future.

“Funds are still investing. Now they’re buying assets, including on listed markets, at a time when others are potentially selling. Funds will pick up these assets at discounted prices, which reduces the extent to which markets would otherwise fall.” Left to their core function, super funds will provide a buffer to markets, just as they did during the GFC.

“Whenever there’s a financial crisis of some form, it’s inevitable that markets will go down,” Linden says. “But it’s also true that they will come up again.” And that money will be waiting for you at retirement.

Consider your own objectives, financial situation and needs before making a decision about superannuation because they are not taken into account in this information. You should consider the Product Disclosure Statement available from individual funds before making an investment decision. Originally produced content by Guardian Labs Australia to a brief agreed with and paid for by Industry SuperFund. The original content can be accessed here: https://www.theguardian.com/industry-superfunds-supercharged-future/2020/jun/18/yes-your-super-has-taken-a-hit-but-now-is-not-the-time-to-disrupt-it.