Australian super fund members have benefited from positive returns for years, but in 2022 our pool of retirement savings shrunk for the first time in more than a decade.
For people approaching retirement like couple Jodie Morgan and Bruce Drummond, every year of super returns counts.
"We've been in a position where we've been able to make extra contributions to our superannuation," Ms Morgan says.
"And we've always tried to think ahead in terms of superannuation and retirement planning."
But there are some things you can’t plan for.
Director of research at Rainmaker Information Alex Dunnin says the average My Super default fund, which most people have their money in, went backwards by around 4.3 per cent in 2022.
"That’s the worst return since the GFC [Global Financial Crisis]," Mr Dunnin says.
If your super balance is $200,000, that's a loss of around $8,000in a year.
The latest measure of total super in Australia is from September 2022 ($3.3 trillion), but at the end of December 2021 there was around $3.5 trillion in super.
Mr Dunnin says the overall 4.3 per cent loss in 2022, converts to a hit of about $150 billion.
"This is broadly the equivalent to all the money contributed into superannuation last year. Long story short, last year's loss pretty much wiped out a year of total contributions."
Using different methodology to Rainmaker Information, analysis from Super Ratings found the median return in balanced funds last year was -4.8 per cent
Research from Super Ratings also found only two super funds delivered positive returns in 2022 — of 1.7 per cent and just 0.1 per cent.
Why did super take a hit?
If you are a super fund member, you invest in the financial markets. That’s because superannuation funds invest your retirement savings in equity and bond markets, property and other private assets on your behalf.
After some early optimism in 2022, central banks aggressively hiked interest rates to tame inflation that was worsened by global factors like Russia’s invasion of Ukraine, disrupted energy markets, China's COVID zero policy, and subsequent supply chain bottlenecks.
Financial and property markets fell as a result.
The Australian All Ordinaries index lost 7.2 per cent in 2022, while the benchmark ASX 200 fell by 5.5 per cent after both lifting around 13 per cent in 2021, according to Commsec.
In New York, Wall Street indices fared even worse.
Mr Dunnin says bond markets, which are usually stable and underpin our super balances, also tumbled.
"It's very, very rare for bond markets and equity markets to have a terrible year at the same time," he says.
"So because so much of our superannuation is invested in equities and bonds, when they have a terrible year, it means all of us have a really, really terrible time. And that's exactly what happened."
Will the bad returns continue?
This year, optimism seems to have taken hold in financial markets. In recent weeks the ASX 200 has hit highs not seen since before the Reserve Bank started raising interest rates last year.
That's good for your super balance.
"The view beginning to creep in around the world is, perhaps inflation has done its dash and it might come down," Mr Dunnin says.
"If it starts to calm down, then interest rates won't need to keep going up, or not as aggressively as they were, or they won't need to rise as often as they were last year.
"That starts to tell people, perhaps we're through the worst of it."
But will the good times last? Mr Dunnin is optimistic.
"When we had the global financial crisis, we had super returns get down to minus 20 per cent... It was an absolute bloodbath," he says.
"But within two years, we'd recovered.
"And we went on to have the best decade ever, and superannuation culminating in 2021 being the best year ever for super fund returns.
"I'm not saying the same thing will happen. And I'm not saying it will happen as quickly — but markets always recover.”
Super industry warns of challenging times
How high interest rates go will be a big factor in how the markets and our super balances fare.
Chief Investment Officer for industry super fund Hesta, Sonya Sawtell-Rickson, oversees the retirement savings of more than 970,000 members. Eighty per cent of them are female who work in the health and community services sector, often in lower paid roles.
Ms Sawtell-Rickson says what keeps her up at night is "unknown risks".
"I think 2023, and I'd even say 2024, is going to be a bit more challenging," Ms Sawtell-Rickson says.
And while very few economists expect Australia to end up in recession in 2022, she expects it will likely still feel like one as interest rates bite.
"Higher interest rates mean businesses that are borrowing might struggle to make investment cases stack up, it means households now have higher cost of debt and higher mortgage repayments, which is going to impact their consumer discretionary income and their ability to spend," she says.
"And so we think these things will now start to slow demand and slow growth over the coming years."
Ms Sawtell- Rickson says Hesta is going after strong returns in energy transition, health care and what she calls “resilience” or investment opportunities in shoring up supply chains.
When asked if super returns will bounce back, she's a little more circumspect.
"I'm very, very cautious to give 12 month return forecasts — it's really a bit of a mug's game," Ms Sawtell-Rickson says.
"But what we do do is spend a lot of time, as a long term investor, on the three to five year forecasts.
"I think over the next three years, we do think returns will be a bit softer.
"I don't think negative but not the strong double digit returns that we've become a bit used to over the past decade."
Unlisted assets
Since the GFC super funds have invested in unlisted assets like infrastructure, toll roads, poles and wires, airports and water, commercial property, hedge funds and venture capital.
There are some concerns unlisted assets, which can be heavily exposed to interest rates because they include high levels of debt, have been over-valued.
If that’s the case, it would mean some super funds are not performing as well as what's being reported.
"When you have the returns from unlisted property funds being declared at a return of about 6 per cent, while stock markets were all negative and bonds were even more negative, it makes you kind of wonder what's going on," Mr Dunnin says.
He says while super fund members shouldn't be overly concerned because most money held in regulated assets, the regulator (APRA) needs to make sure the reporting of unlisted assets is more transparent.
Xavier O’Halloran, director of Super Consumers Australia, agrees.
"It's really important that those valuations are accurate, because if they're not, you may see quite significant movement in the value of your superannuation moving up or down if those valuations are not kept up to date," Mr O'Halloran says.
Ms Sawtell-Rickson does not share their concerns. She says unlisted assets tend to deliver a higher return compared to liquidity at stake, and falling valuations could lead to new investment opportunities for long-term investors like Hesta.
"We monitor our independent valuers to make sure that they are complying with our expectations complying with accounting standards complying with regulatory requirements."
Thinking about switching super funds?
Mr O'Halloran warns fund members not to ditch their fund based on one year of bad returns alone.
"People are understandably concerned about what's going on, there's been a lot of uncertainty in the market," he says.
"But with superannuation, for most people, it is a long term game and, and focusing on what's happening from year to year can be a really problematic way to view your super and you can end up losing a lot of money if you're chopping and changing constantly with the markets."
Instead, he suggests consumers focus on the basics like consolidating accounts to avoid paying excess fees or insurance they don't need, and looking for a low fee account.
"At the moment, their annual fee on a My Super product for someone that's got about a $50,000 balance, on average is about 1 per cent," he says.
"So you're looking at funds with fees that are less than that. And then you're on the right kind of track to making sure the basics of your super are set up regardless of what's going on in the market."
Mr O’Halloran says using theAustralian Taxation Office’s YourSuper Comparison Tool to compare funds is a good start.
Ms Morgan and Mr Drummond don't have any plans to switch super funds.
But if bad returns continue, Ms Morgan says they'll consider delaying their retirement.
"If we saw some dramatic changes, in that the funds were decreasing rapidly, we'd probably rethink again, we might have to extend [working] for another year," she says.
For now, they're hopeful they won't get a second year in a row of bad returns.
"We may need to do things slightly differently in terms of how much travel we do, but I do think we've planned well and we will be fine," she says.
