According to Innova Asset Management’s analysis of Australian Prudential Regulation Authority data,more than 5.2 million young Australians are missing out on higher superannuation returns by investing their retirement savings in default MySuper accounts,rather than investigating higher-growth investment options focused more on equities rather than defensive assets such as cash.
Younger workers can afford to take the risk and invest their super in high-growth assets.Dominic Lorrimer
The analysis of APRA data reveals that an all-equities portfolio spread across Australian shares and unhedged international shares outperformed the typical MySuper balanced fund by 13.6 percentage points over the decade that ended September 1,2023;and by 16.8 percentage points over the period from January 1,1995 to September 30,2023. As MySuper was introduced in 2012,Innova developed a simulated model and ran it from 1995 to test longer-term outcomes.
Our analysis reveals a significant outperformance with important implications for wealth generation. Younger Australians are much better able to cope with the negative returns from an all-equities approach as they have ample time to recover and benefit from the majority of years that stock markets gain. So they can afford to take on more risk in higher-growth superannuation funds than those offered in MySuper accounts.
Innova’s analysis reveals Australians under the age of 40 hold more than 10 million MySuper accounts,so they typically face a 25- to 45-year investment timeframe before they can access their superannuation. In short,younger investors can afford higher-risk options as their retirement is decades away.
According to separate research from the Productivity Commission that was released in 2018,being invested in an underperforming MySuper product could leave a typical new workforce entrant $375,000,or 36 per cent worse off by retirement age.
Clearly,many younger Australians could be doing a lot better with their superannuation and the problem is affecting many workers.
There are currently around 61 MySuper products which are intended as low-cost,simple products suitable for most investors. Most are balanced funds,with a static 70:30 growth-defensive asset portfolio allocation,though a small number are lifecycle funds,in which investors’ exposure to defensive assets increases as they approach retirement age.
MySuper products were designed to cater for a largely disengaged customer base given superannuation’s distant payoff. Those least likely to be engaged – and so would invest in default MySuper products – are young people with lower education,those on lower incomes and people with lower financial literacy. However,even younger Australians on higher incomes with relatively higher levels of retirement savings remain invested in lower-returning MySuper products.
Many investors currently rely on property to build wealth,but for many,especially younger investors,that is out of reach as the cost of buying a property is too high. Many Australians would be financially better off investing more of their savings in assets such as equities and other appropriate investment options,which are typically much more accessible than property.
To compare super funds,you can use the ATO’s. If you find that your MySuper product is underperforming,it’s important to get advice on how you could improve your retirement outcomes.
Many younger Australians who are by default investing in MySuper products would be better off with financial advice. This represents an opportunity for financial advisers to offer more affordable and scaled financial help the generation get the most out of their superannuation.
Dan Miles is the managing director&co-chief investment officer at Innova Asset Management. He has led Innova since 2010 and is responsible for overall portfolio management of Innova’s managed account portfolios.
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