Illustration: Rocco Fazzari.
The worst investment markets for more than 60 years present a dilemma for those in the lead up to retirement. Should they stick with their super fund's ''balanced'' option - and high exposures to shares - or switch to something more defensive?
With investment markets - particularly the Australian sharemarket - making big returns for most years during the 1990s and up until 2008, the returns on ''balanced'' options (where most people have their super) were very healthy.
But the downturn, and continuing volatility on sharemarkets, is hurting account balances.
Those aged between 30 and 40 years old have time for markets to recover. But it's a different story for the over-50s. They have not benefited from compulsory super all their working lives and most will need to salary sacrifice extra into super to make up for it. However, they could be defeated by further market losses if they choose the wrong investment option.
Super funds have several diversified options determined by how much or little they have in growth assets ranging from ''high growth'', ''growth'', ''balanced'' and ''conservative''.
There are also single asset-class options such as Australian shares, international shares and cash.
But most people remain in their funds' balanced or default option.
Data from AustralianSuper fund provided to Weekend Money shows that between the onset of the GFC in 2007 and 2010, only 56,000 members switched their investment options - a very low level of switching, considering the fund has 1.4 million members.
AustralianSuper has an over- representation of over-50s who switched but even among these older members, most stayed with the balanced option.
This could simply reflect people's lack of confidence in dealing with investment decisions.
''Balanced'' options typically have at least half of their money invested in shares but it can be much higher than that and pose risks for older members.
The head of research for DFS Portfolio Solutions, Stephen Romic, says there is every chance markets will continue to be risky and returns ''sub par''. He is critical of the ''static'' portfolio allocations used by most big funds and favours dynamic risk management, where portfolio allocations change as market conditions change.
The traditional approach to asset allocation takes a long-term view, holding a more or less static asset mix, he says.
Markets can fluctuate, so the reasoning goes; but in the long term, it all washes out. But the market can change drastically and take years to recover.
Under these conditions, an investor holding a static portfolio will see their level of risk exposure fluctuate considerably, he says.
Romic's approach is to start with a ''risk budget'' that matches an investors' tolerance for risk. The portfolio's asset allocation changes but the level of risk in the portfolio stays the same.
DFS's balanced portfolio, for example, had an exposure to shares of about 30 per cent as of September last year and is now about 35 per cent - still much lower than most of the balanced options of the big funds.
Funds are reviewing their balanced options, though they may decide to stick with the same allocation, the head of post-retirement solutions at Towers Watson, Nick Callil, says.
He says several funds are evaluating whether they should have dynamic asset allocation for their balanced options. Some funds are looking at a ''life-cycle'' approach, where the fund members are stepped automatically to a more defensive option when they reach a particular birthday, he says.
Researcher Chant West's table below provides a useful tool on market risks.
What to do
The main message is fund members should not assume their fund's balanced option is the best one for them. Romic says the first step is to check how the assets are allocated, as labels can be misleading.
To help members come to grips with it, the super industry is putting in place a standard risk measure.
From midyear, each investment option will be given a risk ranking according to how many negative annual returns it is likely to produce over 20 years.
Each fund's investment options will be put into one of seven risk bands - from ''very low'' to ''very high''.
Importantly, it is likely that under this standard risk measure many balanced options would be classified as ''high'' risk as they could be expected to have about six negative years during any 20-year period.
However, Cameron O'Sullivan, the co-founder of Provisio Technologies, which provides advice tools to super funds, says members need to know how much income they are likely to need in retirement. A sole focus on returns could lead members to needlessly switch their option because of short-term underperformance, when super is about the long term, he says.
Most fund statements show the performance of the fund's investment options and the member's account balance with no reference to the actual impact on their retirement.
''Even those 45- or 50-year-olds, for whom retirement is front of mind, still do not often know what retirement income they are on track to get,'' he says. ''It is as if you are driving somewhere without knowing the destination.''
He is working with funds to help them include retirement forecasts in members' statements.
The aim is to show members, based on their life expectancy, how much they will need for a comfortable retirement. If there is a shortfall, the member will be told how much they should contribute to their super in addition to the 9 per cent compulsory contributions.
The income you need in retirement
Most superannuation funds have retirement benefit calculators online, as does the Australian Securities and Investments Commission at moneysmart.gov.au.
But fund members need to take a holistic view of their retirement savings, Tower Watson's Nick Callil says. They need to include other assets they have into their calculations and whether or not they are likely to get a part-age pension, which can provide a buffer in volatile markets.
Someone who has significant assets outside of super could take higher risks to achieve higher returns long term, he says. But that will depend on the level of assets outside of super and how those assets are invested.