Once again, the last financial year has been kind to superannuation investors! Many super funds have delivered double-digit investment returns. However, not all super funds are created equal and some of the risks that I have written about in past years have come home to roost in the past 12 months.
Investment returns for the 2023-2024 financial year
The table compared investment returns for the periods ended 30 June 2024 for the Balanced investment option for the largest 8 industry super funds. A Balanced investment option allocates between 60% and 76% of your superannuation balance into shares and growth assets.
Here are the results for the Growth investment option i.e., between 77% and 90% of your balance is invested into shares and growth assets.
I have previously warned about unlisted assets
I have written a blog reviewing super returns every year since 2021 (here are the links to my past blogs: 2021, 2022 and 2023). Each year, I have highlighted my concerns with the lack of transparency regarding what investments they hold, especially unlisted assets.
Some industry super funds have reported lower returns for the 2024 financial year due to inferior returns from these unlisted assets. However, there’s still not enough reporting and oversight.
Until investment disclosure standards improve, it’s impossible for financial advisors/professionals to thoroughly evaluate and compare the strengths and weaknesses of each industry super fund’s investment portfolio. That is, it’s impossible to ascertain what investments they hold. To mitigate these risks, I prefer to recommend super funds with a significant allocation to listed investments. Listed markets offer higher transparency, frequent trading, and strong regulation, which means investment returns and valuations are more reliable.
Potential for conflicts of interest
Many industry funds have strong connections with trade unions and the Australian Labor Party. In fact, most directors on the boards of trustee companies are union members, acting as either employee or employer representatives. Unfortunately, many of these directors lack significant experience or knowledge in investment markets and superannuation generally. Independent directors are almost always in the minority.
Recent allegations against the CMFEU have once again highlighted these connections. For example, it has been reported that Cbus, a construction industry super fund, paid the CMFEU $1.25 million during the 2022-23 financial year for sponsorship services. The chairman of Cbus is also the President of the ALP, which is surely a conflict of interest, given that Cbus has announced that it will invest half a billion dollars in the ALP’s National Housing Accord. The goal of super is to grow retirement savings, not advance government agendas.
I strongly believe that no institution, including all political parties and unions, should have any influence over Australians’ retirement savings. The superannuation industry must be entirely free from vested interests.
Choose a fund that can offer you advice
The government has recently passed new laws making it easier for super funds to provide limited financial advice to their members. This could be beneficial if you need guidance on basic superannuation matters, such as whether to make additional contributions.
While the idea of super funds offering advice sounds good in theory, it has sparked a lot of industry debate. The lower training and qualification standards are less than ideal. More importantly, there’s a significant conflict of interest since super fund advisors can only recommend their own super fund’s products. This link between advice and the product has been problematic in the past. For basic advice, this may not be a major issue, but super fund employees are not well-placed to answer critical questions, like whether their fund is the best option for you due to this inherent conflict of interest.
Perhaps High Growth is the best option for you.
If you’re more than 10 years away from accessing your super, consider investing a large portion (80% to 100%) of your super balance into share markets to maximise your returns over the next decade or more. That is, select a Growth or High-Growth pre-mixed investment option, as I discussed in detail in my previous blog here.
Since super rules restrict you from accessing your super until you are at least 60 years of age, use this to your advantage by choosing investments with the best potential for maximising long-term returns. History tells us that share markets typically provide the highest returns over very long periods of time.
If you have more than $750,000, perhaps don’t use an industry fund
Industry super funds charge fees based on a percentage of your balance. This means that as your balance grows, so do your fees. They use percentage-based fees because many members have very low balances, which means those with higher balances end up subsidising the costs of those with lower ones.
In comparison, many wrap platforms are not only cheaper but offer full transparency on how your money is invested – your super balance is protected from vested interests. For example, a cost-effective industry super fund might charge around 0.67% per year, whereas a wrap platform could charge less than 0.50% p.a. This can lead to significant annual savings for balances over $750,000, not to mention the added tax efficiency of wrap products, as I discussed here.
If your super balance is over $500,000 and you anticipate it will exceed $750,000 in the coming years, then you might like to investigate alternatives to industry super funds. Of course, it’s critical to ensure investment returns will be commensurate.
The best fund is…
I believe that UniSuper is the best industry super fund for the following reasons:
- Its past investment returns have been consistently strong;
- Its Balanced and High-growth investment options have the least exposure to unlisted assets (which could include infrastructure, private equity and property), being 14% and 8% respectively;
- It charges the lowest percentage-based investment and administrative fees; and
- It offers financial advice to its members.
I acknowledge that Australian Retirement Trust’s historic investment returns are very strong. However, it has a large allocation towards unlisted assets. Its investment fees are also a lot higher than UniSuper’s.
However, of course, you should seek personalised financial advice before switching super funds as there may be many other important matters to consider that I haven’t discussed, such as insurance.
