Superannuation outlook shows uncharted territory

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An optimistic mood, relatively speaking, among Australia's superannuation investors marked the start of 2011, triggered mainly by the solid sharemarket performance of the previous two years. But it has been badly shaken.

As we head into 2012, global financial uncertainty - the result of Europe's sovereign debt woes and the weak US economy - once again is threatening to undermine hopes for a sustained rebound by world sharemarkets and, along with it, the chance for a major recovery in the returns generated by superannuation.

"We are in an unprecedented time for Australia's superannuation system," says Jeff Bresnahan, the head of research group SuperRatings. "While there have been flat and negative years before, superannuation has never previously suffered from such a prolonged period of investment uncertainty, and this may well continue into 2012."

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As Bresnahan points out, a lift in performance in 2010 and through to March 2011 had resulted in balanced super funds delivering a median return for 2010-11 of 7.5%.

Since then, however, it has been a different story and the sharemarket sell-off since April has slashed the return for these funds to -0.3% for the year to the start of October.

Just how costly the sharemarket woes of recent years have been is highlighted by the fact that the median rolling annual return for balanced funds over the five years to the start of October was just 0.9%.

The worldwide financial uncertainty means the odds of a sustained rebound are relatively long at the moment, a situation that may prompt some superannuation investors to shift out of balanced investment options into cash.

Pauline Vamos, the chief executive of the Association of Superannuation Funds of Australia, acknowledges this possibility but stresses the importance of taking a lot of care before shifting to a highly defensive investment option.

"Disappointing short-term returns, including those that may be produced next year, shouldn't be the main focus," she argues. "Growth assets have proven themselves as an effective way to build long-term wealth, and this is likely to be the case in the future."

Even retirees have to look to the long term, she adds, although this can be difficult for anyone who is already drawing out income in the form of an account-based pension.

Somewhat ironically, the concession granted to superannuation pensioners allowing them to draw out 50% of the usual minimum amount has been tightened in 2011-12 to 75% and this concession is due to be removed altogether in 2012-13.

Many retirees are probably hoping that, should the downturn continue, the original concession will be restored in the new year. But, according to Vamos, the odds of this happening are long.

"In general, retirees have responded to the global financial crisis by shifting more of their money into cash," she says. "This means they are less exposed to the impact of falling sharemarkets and so less in need of the same sort of drawdown relief that was extended when the GFC first hit."

Bill Shorten, the Minister for Financial Services and Superannuation, remains committed to a range of other superannuation initiatives. Some of these were outlined in the federal government's Stronger Super reforms released in September while others are the result of specific election promises. One promise that is due to take effect from July 2012 is the provision of a 15% tax rebate on the compulsory super contributions made on behalf of employees earning less than $37,000.

Another scheduled to start from this date is the promise to extend the $50,000 concessional contribution cap for those 50 and over whose accumulated super is less than $500,000. Those with more than this will have the same $25,000 cap as those under 50, with the change due to take effect on July 1.

David Shirlow, the head of technical services with Macquarie Adviser Services, says the super industry hopes the government will modify this policy to make it more workable. "We believe the government should reconsider this policy in part because it is administratively very difficult to implement," he says. Along with many in the super industry, Shirlow argues a preferable approach is to provide everyone 50 and over with the cap of $35,000. "This is much more workable while still providing this age group with a useful concession," he says.

Most other super promises and rule changes are unlikely to be fully implemented next year and most will not take effect until later years. These include the proposed low-cost MySuper default investment option and the promise to abolish the age cut-off for compulsory super guarantee contributions; the first move is a lift in the cut-off age from 70 to 75. Both MySuper and the higher cut-off age are scheduled to start in July 2013.

The main exception is the ongoing implementation of what is known as SuperStream, a set of changes aimed at improving the efficiency of the superannuation system. The implementation of these changes is already under way. One that took effect from July is the new ability of super funds to use a member's tax file number as the main identification reference for his or her account.

Others being implemented are new processes to make it easier and quicker to roll over money from one fund to another and the adoption of enhanced technology to boost fund efficiency and, hopefully, lower costs.

Finally, it is likely the coming year will be a relatively quiet time for self-managed superannuation funds, at least from the perspective of regulatory changes.

The main issues foreshadowed by the government's Stronger Super policy statement include efforts to ensure auditors of SMSFs are independent, restrictions on the ability of accountants to help clients establish SMSFs and new rules to require related-party transactions to be conducted through the market where one exists.

The last of these changes would severely restrict so-called in specie transfers, such as the transfer of shares from a member to his or her SMSF. In future these would have to be handled through the sharemarket, adding to red tape and transaction costs.

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Peter Freeman is a former managing editor of The Australian Financial Review. He runs his own self-managed super fund.

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