When a MySuper product or super fund talks about investment performance, they can use many terms that confuse members. They even confuse many people who run super funds. So, what does 'investment performance' actually mean?
Investment performance describes how much your super product or fund is earning for you each year, each month, each day. Think of it as the investment profit they are making for you. Investment performance is also sometimes called the investment return, performance, or sometimes just the return.
Another problem is that some products or funds report investment performance before they have deducted tax, some may deduct the tax and the investment fees but not the ongoing percentage-based fees, and some may deduct all taxes and all the percentage-based fees. Almost none, however, will deduct the dollar-based flat fees when declaring their investment performance even though for people starting out in super, who only have a small amount of superannuation savings, this fee is their biggest headache.
|Earnings rates and crediting rates|
|If you are a member of an in-house corporate, public sector or industry fund (known as a not-for-profit super fund), your MySuper product or super fund will often talk about its investment performance in terms of its earnings rate and its crediting rate.
The earnings rate is the investment performance earned by the super fund after paying the investment managers their fees but before paying the investment taxes and other ongoing fees. Think of this number as what it earns from the capital markets before deducting its own operating costs. This earnings figure can also be thought of as how good your super fund's trustees are at picking investment managers.
The crediting rate, on the other hand, is the investment return after all taxes and all the percentage-based management fees have been deducted, where these management fees include ongoing administration and investment fees. It is what has actually been deposited into your account. SelectingSuper goes one extra step when publishing its crediting rate performance tables. We make an allowance for the impact of dollar-based member fees.
For the average superannuation investor, the relationship between a product or fund's earnings rate and its crediting rate is also very important to understand because it can tell you much about how a super fund operates. This is because from their earnings rate they pay investment taxes and other costs associated with operating the super fund. The bigger the difference, the more fees and costs are being deducted. For example, if your product or fund earned 10% but only credited 8% into your account, it means your true level of fees is the difference, that being 2%.
|Some super funds may also divert some of their earnings rate into a reserving account to help build up a nest egg so they can top up returns in bad years. The downside, of course, is that in good years the returns will not be as good as they should be because some of the return has been diverted into this reserving account.
Some people think these reserving accounts are bad because they take returns away from members in good years. Others think they are good because they boost members' returns in bad years. The truth is they are neither bad nor good, but if your fund uses one it is important to understand how it works and why they have it.
The only twist with reserving is that it can penalise people who don't stay with the fund for a long time as some of the fund's earnings are hived off for that rainy day that may not come around until after you have left the fund. The flip side is that if you join in a bad performance year you could get a better return than funds that don't use reserving. It's a case of swings and roundabouts.
|Flat dollar fees|
|If your MySuper product or fund charges a flat dollar fee, such as a member fee or a policy fee, it is usually paid after your crediting rate or after-fee performance has been declared and paid into your account. These member fees can have a significant impact upon your true return. For example, if you have $10,000 in super, even if your member fee is just $1 per week, it effectively means that an extra 0.5% will be deducted from your account.
Of course, as your super account grows, the impact of this member fee diminishes. For example, if you have $100,000 in superannuation, the impact of this member fee is only 0.05%. The lesson here is that flat dollar fees can impact people with low super account balances more than they realise. Most retail superannuation funds do not charge flat dollar member fees, but most industry funds do. The thing to watch though is that funds with member fees should have low percentage-based fees.
Fees affect performance
While in-house corporate, government and industry super funds speak in terms of earnings and crediting rates, retail super funds being corporate and personal master trusts usually just speak in terms of 'performance'. This can mean, depending upon the fund, either the earnings or the crediting rate, or something in between. But it's not as confusing as it seems because in many cases they effectively mean crediting rates anyway, which you will recall are just the returns after all percentage-based fees have been deducted. The sting in the tail, however, is that many master trusts have a tiered fee structure.
A tiered fee structure is when the fees differ depending how much you have invested with the fund or how much is in an employer's combined company account. For example, if you have less than $50,000 in your super fund account, you may pay 1.4% in fees, but if you have more than $200,000 in your super fund account, you may pay fees of only 0.7%.
This means that two people in the same super fund may be paying quite different levels of fees and as a result receive different crediting rates; remember that the crediting rate is effectively the earnings rate less all the fees. These differing fees in the one fund can also mean that while low-balance members may be better off in an industry fund, members with higher balances who qualify for fee discounts may sometimes be better off in a retail fund, i.e., a master trust.
|Deconstruct your fund's investment returns|
|Not For Profit Fund||Corporate Master Trust||Personal Master Trust|
|Capital gains from markets||10.0%||10.0%||10.0%|
|Less investment fees + taxes||0.7%||0.7%||0.7%|
|Fund earnings rates||9.3%||9.3%||9.3%|
|Less other management fees||0.2%||1.0%||1.4%|
|Your crediting rate||8.5%||8.3%||7.9%|
|Do you know who runs your super fund?||How does a super fund invesment menu work?|