Where can super funds invest when interest rates are low?
It's hard to make long-term money when rates are edging towards zero.
Following the Reserve Bank's cutting the official cash rate to a record low 1.5% this week, much of the attention has been on the impact that change has had on home loan interest rates and what gets paid for term deposits. However, the long-term trend of low interest rates also poses a challenge for superannuation funds.
While super is designed as a long-term investment to fund individuals in retirement, interest rates are still largely important. The broad aim of many funds is to have a return that's around 4% above CPI when considered over a 10-year period. However, even when CPI is low (it currently sits at 1%), that can be challenging.
The table below shows the expected rates of return for many traditional asset classes included in super funds, based on a survey of fund managers and asset consultants by research firm Rice Warner. The survey was conducted in 2012 and 2016, and across the board the expectations are that returns will be lower. The biggest drops are in cash and fixed interest, which don't meet the requirement of being 4% above CPI anymore. Stocks (equities) have a more solid return, but even that area has dropped.
| Asset class | 2012 survey | 2016 survey | Drop |
|---|---|---|---|
| Australia equities | 9.0% | 8.2% | -0.8% |
| International equities (hedged) | 8.8% | 7.7% | -1.1% |
| International equities (unhedged) | 8.5% | 8.0% | -0.5% |
| Listed property | 7.8% | 6.6% | -1.2% |
| Direct property | 7.9% | 6.6% | -1.3% |
| Australian fixed interest | 5.4% | 2.9% | -2.5% |
| International fixed interest (hedged) | 4.5% | 2.8% | -1.7% |
| Cash | 5.0% | 3.3% | -1.7% |
What alternative strategies can be pursued? Investments in less traditional areas such as infrastructure are possible, but even that isn't necessarily as effective as it once was. Rice Warner notes that long-term yields on infrastructure investments have dropped from 12% to 8% over the last four years.
Superannuation remains a political football in Australia. Proposed changes in the 2016 Budget that would cap non-concessional contributions (extra money on top of what your employer pays) at $500,000 over your lifetime are expected to be pursued in the current Parliament, though they have been unpopular with some Coalition members. With a growing older population, getting it right is critical.
Angus Kidman's Findings column looks at new developments and research that help you save money, make wise decisions and enjoy your life more. It appears Monday through Friday on finder.com.au.
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