Published: 17 Apr 2020
The current investment market conditions would understandably be a cause of much concern to our pension members.
The key question, which many are seeking an answer to is: “Should I be switching my pension assets into cash or some other less risky option?’’
Investment markets go up and down. That’s what they do, sometimes a lot, sometimes a little, but that’s what they do and it’s expected. Energy Super has implemented investment strategies to maximise outcomes for members over the investment time frame that is most relevant to members’ best interests. These strategies recognise that there will be market downturns (sometimes severe) during this time. The strategies have been designed to ride the inevitable ups and downs of investment markets in the past, during current times and into the future. It is vitally important to understand that you haven’t actually lost anything until you sell your assets. This is known as ‘realising’ or ‘crystallising’ a loss.
What to consider if you are thinking about changing your investment strategy:
Your time horizon
A key factor in making any investment decision is the time horizon relating to the investment.
The charts below show the Balanced return for the 3 months, 3 years, 5 years and 10 years to 31 March 2020. The charts indicate how critical your investment time horizon can be.
It is important to recognise that for members in the early stages of retirement, their investment time horizon could be as long as 20 to 25 years (assuming average life expectancy of around 85 years1). Of course, for those in the later stages of retirement, the situation would be different but is still likely to be many years.
We have talked about this in a previous communication to members. In the short term, it is impossible to predict when markets are going to rise or fall or by how much they are going to rise and fall. It is therefore impossible to predict the best time to sell (or buy) investment assets.
Historically, over any period of twelve months, investment markets have risen far more often than they have fallen and rises have often been at their steepest in the years following a market crash.
In managing risk, it is imperative to define what is meant by ‘risk’ in the context of each member. Risk is often defined as the possibility that an asset might fall in value, which is why shares are deemed ‘riskier’ than cash because shares can see big falls in value, whereas cash remains stable.
But risk can mean something different to some investors dependent on their circumstances. For example, cash would historically have proven to be far more ‘risky’ than shares if they were looking to maintain enough income to finance a certain level of retirement lifestyle. Over a longer period, cash investments have historically yielded far less money for a member to rely on during their retirement. Of course, this may not be true over shorter time frames and a member’s specific investment time frame is a key consideration.
When a member reaches the point of retirement, relatively few would take all their retirement savings out in cash and “stuff it under their mattress”. When a member enters retirement, most would leave their money invested in the market (usually in the form of an account-based pension). Regular withdrawals in the form of a pension would be made in very small amounts each month or fortnight over that period, with the balance of their account remaining invested in the market for many years ahead. This would enable the member to recoup any losses over the longer term.
The Covid-19 crisis in perspective
Research by Rainmaker highlights that the average rolling 12-month returns for Balanced options during the GFC reached as low as -20%2 whilst the 12-month return for Energy Super’s and many peer funds’ balanced options for the 12 months to 31 March this year has been much less severe at around -6%. History tells us that superannuation funds have successfully navigated through market shocks even greater than the one we are currently experiencing.
What should I do now?
Choices for each member include the following:
1. Hold your course and do nothing
Whilst there has been an increase in member switching activity during times of market stress, the vast majority of Energy Super members, in common with peer funds across the country, are doing nothing. Remember that you haven’t actually lost anything until you ‘crystallise your loss’. Crystallising a loss happens when you sell your assets by switching to another option or withdrawing funds.
It is your fund’s performance over a number of years that matters and not the returns you are receiving over the course of a few months.
Although you may choose to do nothing, the investment team at Energy Super continues to stick to their long-term strategy whist constantly monitoring market movements and implementing the daily investment management that is undertaken during all market conditions.
An example of the benefits of Energy Super’s long-term strategy is that, despite a fall of around 13% in the ASX200 index over the year to 31 March 2020, the Energy Super Balanced option’s return fell by only 5.6%. This reflects the measures already in place through diversification of the asset mix to protect members in the event of steep share market falls.
2. Switch into cash or a more conservative option
Switching to cash would protect you from any further falls in investment markets and provide some immediate peace of mind. However, this may not be a good time to sell your assets as you would crystallise your losses and would not benefit from any future market rises. This choice is likely to result in lower returns over the longer term and a higher probability of falling short of retirement funding objectives. It is of course up to each member to weigh up the relative importance of peace of mind versus investment returns in their specific circumstances.
3. A combination of 1 and 2 above
By switching some money into cash or other lower risk option, you could draw on the cash/other option for a period of time whilst leaving the balance of your investments in an option that would benefit from market upswings. This would entail crystalising some losses immediately. Overall, this strategy is likely to produce lower returns than doing nothing but may provide greater peace of mind, at least in the short term.
4. Reduce your pension payments for a period of time
To assist retirees, the government has temporarily reduced the minimum super drawdown requirements for account-based or allocated pensions, annuities and similar products by 50% for the current financial year and the 2020-21 financial year. This should reduce the need for retirees to dispose of investment assets in the current share market downturn to fund their minimum drawdown requirements.
5. Review your eligibility for Government assistance, such as the Aged Pension
Rules have changed over the years, with the latest being the drop in deeming rates and with some asset value declining, it could make sense to re-assess your situation to consider whether you could be entitled to some benefits.
Naturally, some members will have specific circumstances and concerns which mean that their investment strategy may need to be reviewed in their specific context and Energy Super is here to help under such circumstances.
If you don’t have a financial adviser, it might be a good idea to speak with one of our financial advisers provided through ESI Financial Services*. Depending on your needs, this may be at no cost to you.
To arrange an appointment for a phone consultation, contact us.
1 Australian Bureau of Statistics using World Health Organisation data
* Energy Super has appointed ESI Financial Services Pty Ltd (ESIFS) (ABN 93 101 428 782) (AFSL 224952), a wholly owned entity of Energy Super, to provide financial advisory services to members.
Investment returns are not guaranteed. Past performance is not a reliable indicator of future performance. This article was prepared in April 2020 by Electricity Supply Industry Superannuation (Qld) Ltd (ABN 30 069 634 439) (AFSL 336567), the Trustee and Issuer of Energy Super (ABN 33 761 363 685), and may contain general financial advice which does not take into account your personal objectives, situations or needs. Before making a decision about Energy Super consider your financial requirements and read the Product Disclosure Statement, available at energysuper.com.au or by calling 1300 436 374.