Funds warned: Don’t overpromise on target returns

Superannuation funds which are still suggesting they can achieve pre-COVID-19 target returns probably need to rethink their approach, according to actuarial research and ratings house, Rice Warner.

In an analysis published this week, Rice Warner noted that all MySuper funds show a target (expected) return which they expect to earn above the consumer price index (CPI), after deducting fees and taxes.

“This comparable metric assumes a 10-year time horizon, which is generally a good proxy for the long-term,” it said.

“In recent times, some superannuation funds have reduced their target returns but most still believe they can achieve similar long-term results (relative to inflation) as they did in the past.  However, given the world is in the deepest recession in 90 years, we should challenge whether the future will be as benign as the recent past,” the Rice Warner analysis said.

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“Ironically, many consumers are still likely to use past performance as the logical basis for peer comparisons, even though all funds must emphasise that this is no guide to future performance.  While the past can be a poor guide to the future, it has to be said that those funds with a 25 or 30 year history of earning CPI + 4% or even 5% must be doing something right, persistently.”

“The only other comparable metric is the target return, so it is important that this be calculated reasonably. If it is not, consumers will chase the highest target without understanding the risk involved (or the basis of calculation),” the Rice Warner analysis said.

“The range in target returns between funds is large and some appear very optimistic.  The layperson would not understand the peer differences in asset allocation and risks taken; the information in MySuper disclosure documents necessarily is dumbed down to meet broad community levels of financial illiteracy.”