Australians in the dark on super investments as COVID-19 hits retirement savings

  • New research shows many Australians wrongly believe super funds automatically de-risk to protect losses during market downturns
  • Superannuation members are missing out on better investment outcomes due to poor asset allocation

SYDNEY - 25 May 2020: In the weeks leading up to the COVID-19 crisis and its dramatic impact on markets, the majority of Australians believed their superannuation fund would protect their retirement savings from a downturn, according to new research from leading global pensions and investment adviser Russell Investments.

The research comes as fear around the erosion of Australia's retirement savings intensifies, with the latest figures from Chant West revealing the average growth (balanced) fund dropped 9% in the month to March 31 and 10.1% for the March 2020 quarter. While the Australian share market has since rallied to record its best month since 1988, April was still characterised by whipsawing volatility.

Russell Investments surveyed more than 3,000 working Australians in January this year, prior to the market collapse, to gauge their perceptions of investments within superannuation.

A topical misconception was the belief that super funds automatically de-risk to protect members from potential losses during a market downturn – a view held by two thirds of working Australians surveyed.

Meanwhile, more than a third (37%) believe their fund already manages their investments based on their own personal circumstances – even if they do not actively choose how their super is invested within their fund.

Critically, the research found the majority underestimate the importance of asset allocation in driving returns. Just one in five people correctly identify asset allocation as one of the most important determinants in achieving adequate super savings for retirement – showing a lack of connection between how super is invested and retirement outcomes.

Room for improvement

Managing Director of Russell Investments in Australia, Jodie Hampshire, said the impact of COVID-19 had shed light on how exposed many Australians remain in today's modern defined contribution super environment – but it also gave clear direction on how we can do better.

She said enabling members to adopt more individual, goals-based investment strategies was an emerging path for global retirement plans to help members better manage their investment choices – and thus retirement outcomes – through inevitable market cycles.

"As an industry we can, and should, be doing more to help investors navigate this climate of increased uncertainty," Ms Hampshire said. "For working Australians, asset allocation is one of the strongest factors driving retirement income adequacy. Therefore, having the right asset allocation at the right time is critical – members who don't take on enough risk when they are able to could see their super balances stagnate while overly aggressive asset allocation at the wrong time can jeopardise a lifetime of savings."

Ms Hampshire said that asset allocation is often overlooked in industry discussions around retirement income adequacy compared to other considerations such as fees, which have a smaller influence on retirement outcomes.

"Australian super funds – including the team at Russell Investments Master Trust – work hard to provide members with the information and education they need to make the right investment decisions. However, our research shows choosing investments within super remains a minefield for many working Australians, leading to misinformed choices, or no choice at all. This is particularly the case in times of severe market uncertainty where strong emotions and behavioural biases have a heavy hand in decision-making," she added.

Other key findings from the research include:

  • 67% of those surveyed do not know how their super is invested or leave it to their fund's default approach.
  • More than one in five (21%) did not know they could choose their investments in super.
  • Those who have made an active investment choice are significantly more likely to have also set a goal for the amount of super they want to save for (or spend in) retirement.
  • For those who have made an active investment choice within their super:
    • Only 30% believe they have the right investment experience to pick their own investments.
    • Meanwhile, 28% still pick their own investments, despite admitting they don't have much investment experience.
  • When making their investment choices, one in four rely on help from a friend or relative with financial knowledge (25%). Meanwhile, only three in ten (30%) say they reference information from their super fund.

Global trend to ‘personalised' retirement saving

According to Ms Hampshire, even Australia's mandated super system will struggle to deliver adequate retirement outcomes for many Australians. She pointed out the figures from the World Economic Forum which revealed the nation has a retirement savings gap of US$1 trillion, expected to rise to US$9 trillion by 20501.

"A key weakness of our current system is its inability to deliver investment strategies that address individual retirement goals. Super funds are serving up one-size-fits-many approaches to investing that might look sensible on average, but in the real world, nobody is average," she said.

"While MySuper has helped nudge people into higher growth default options, the contributions of a 25-year-old entering the workforce might still be invested in the exact same way as a 62-year-old nearing retirement," she said.

The introduction of lifestyle or target date funds has been a step in the right direction, however age-only strategies are designed for a group of individuals, instead of delivering an optimal outcome for each and every individual, Ms Hampshire said.

"Our next challenge is to efficiently deliver an approach to asset allocation that is more personalised to an individual's own retirement goal, and to their particular financial situation."

Ms Hampshire said the move to more personalised super would emulate other industries such as the retail and health and wellness sectors, which have harnessed data and technology advances to offer a more personalised delivery of products and services to meet the unique needs of individuals.

"Our global work in retirement planning shows the same approach can, and should be, applied to superannuation. In fact, Russell Investments has been working hard to solve how we can bring the same asset allocation technology used with the world's largest liability driven investors to improve investing within super for individual members," she said.

"Ultimately, we see that personalised, goal-based investing in super is the next big step to helping even more Australians achieve the retirement lifestyle they desire."

1 World Economic Forum, Investing in (and for) Our Future, June 2019 http://www3.weforum.org/docs/WEF_Investing_in_our_Future_report_2019.pdf

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