Even strong super returns leave some retirees 'in the red' Challenger's Jeremy Cooper has criticised the tone of Chant West's superannuation report. Picture: Himbrechts Dan Source: TheAustralian LAST year's strong performance by superannuation funds in Australia has still left more than one million Australian retirees "in the red," says Challenger group executive Jeremy Cooper. He was criticising the tone of last week's report by consultants Chant West that said the median superannuation growth fund had reproduced a return of 15.6 per cent in the year, the equal best return (with 2006-07) from Australian superannuation in 16 years. Mr Cooper accepts the numbers, but believes the report fails to emphasise how different the calculations are for people already retired. Mr Cooper, who chaired the 2008 review into superannuation and who is now focused on annuities via his job as chairman of retirement income at Challenger, said that the arithmetic worked differently for people who had already retired and were living on their super. He said that the Chant West conclusion that Australia had now enjoyed four consecutive financial-year returns averaging 8.8 per cent per annum was "pleasing if your money has been locked away, but it's just not enough if you have been using your super for its intended purpose of providing income in retirement." His main point is that he believes many pre-global financial crisis retirees had their capital base severely eroded by the events of 2008 and 2009, and that even a succession of positive return years - such as we have just had - has not been enough to rebuild that asset base. Mr Cooper's comments were reinforced by State Street Global Advisers' Dan Farley, who said the traditional balanced super fund, with a 70-30 allocation to growth versus defensive assets, is failing to deliver appropriate outcomes for members who are in retirement. Mr Farley, who heads SSGA's Investor Solutions Group, said that "despite returning an average of 14.7 per cent (before fees) for the financial year 2012-13, the typical balanced fund returned only 3.8 per cent per annum over five years," according to Mercer figures. He said that "as an industry we have failed to effectively manage the key investment risks associated with retirement such as accumulation, longevity, volatility and inflation." He said that there was "one end game" that mattered and that was the suitability of investments through different stages of life, equity risk and asset protection during specific market regimes, and the allocation of portfolio expenses." Mr Cooper said that during a market downturn such as the GFC, growth fund members who were in retirement "suffer a double whammy of income drawdowns happening at the same time as capital erosion." By way of example he produced the illustration of a home-owning single woman, Jan, who retired on June 30, 2007, aged 65 with a super balance of $400,000. Using Chant West's performance numbers for the subsequent years, which particularly featured negative returns in 2007-08 and 2008-09 and a skinny 0.5 per cent return in 2011-12, he said the 27 per cent reduction in her capital base because of the GFC meant that an annual drawdown of only $20,000, indexed after 2007 for CPI inflation, had cut her capital base back to below $300,000 after two years of the GFC effect. And although it has subsequently recovered slightly from the low point of $290,479 in 2009, it is still just below $300,000, at $298,715. He also indicated Jan would now be more than $23,000 better off, with a capital base of $322,015, if she had switched out of the median growth fund at the end of the 2007-08 financial year to a more conservative fund with a lower equity component, carrying between 21 per cent and 40 per cent of growth assets compared with between 61 per cent and 80 per cent of growth assets in the previous median fund. Warren Chant agreed yesterday with Mr Cooper's comment that his numbers told only half the story, saying that Chant West provided two sets of survey numbers, one for people in the accumulation phase, as his recent report was, and one for people in the pension phase. "Mr Cooper and I talk very amicably but in this instance I believe he's taken something of a worst-case scenario which doesn't reflect what really happened in the bulk of cases," Mr Chant said. He said that not many members moved out of growth assets at the end of the 2008-09 financial year "because they were feeling devastated after losing around 22 per cent, so in most cases they decided to wait." He said if Jan had switched a year later, she would not have done as well as in Mr Cooper's example. "She would now have a balance of just over $280,000, which is less than if she had stayed in a growth fund," he said. And if she had switched at the end of 2009-10 she would now only have just over $286,000. That is almost $36,000 less than if she had switched earlier. "It makes a great deal of difference if you choose different dates as a starting point for performance numbers," Mr Chant said. He said that although he agreed with Mr Cooper's interpretation of how some conservative strategies had done better than growth strategies over five years, at 4.9 per cent against 4.1 per cent, it was also true that over the past three years the position had been reversed, with growth averaging 8.4 per cent a year and conservative funds returning 6.6 per cent.