Examining the equity holdings of Australian Super Funds. Too high, too low or just right?

Transcription

1 Examining the equity holdings of Australian Super Funds Too high, too low or just right?

2 Outline 1. Sources of investment return why hold equities at all? 2. Features of the Age Pension who gets it and how important is it? 3. ABS wealth statistics Super is one sources of retirement income 4. Equity holdings in super - international comparisons 5. Retirement strategies and equity exposure 6. Trustee responsibilities with respect to other relevant factors

3 Sources of Investment Returns Plenary

4 Sources of real investment returns The real yield on government inflation protected bonds Price changes due to real interest rate changes An expected premium for broad economic risks Net returns (after fees) to active management Randomness, noise, luck and other unexplained factors

5 Australian Government Real Interest Rates Source: Reserve Bank of Australia Statistical Tables. Capital Market Yields, Government Bonds, Indexed.

6 The Age Pension Plenary

7 Characteristics of the Age Pension Pension plus basic supplement: $20,088 (single); $30,285 (couple) Eligibility in 2011: 46% Full; 31% Part; 23% Self-funded Full pension: 26% (65 year-olds); 51% (75 year-olds) Dependency ratio: 7.5 (1970); 5.0 (2010); 2.7 (2050) Single home owner asset test: $192,500 (Full); $707,750 (Part) Couple home owner asset test: $273,000 (Full); $1,050,000 (Part) Source: Australian Government Department of Human Services, Intergenerational Report 2010 and Rice Warner, Touchstone August 2012, "Reforming the Age Pension.

8 Value of Age Pension ($ 000): g = 1.6% pa and r = 1.5% pa Age Female Male Couple Couple per person Source: Australian Bureau of Statistics, Life Tables Australia and author's calculations

9 Value of Age Pension to Single Females ($ 000) Age g = 1.6%; r = 1.5% g = 0.8%; r = 1.5% g = 1.6%; r = 3.5% g = 0.8%; r = 3.5% Source: Australian Bureau of Statistics, Life Tables Australia and author's calculations

10 Sources of Retirement Income Plenary

11 Characteristics of Retired Households Reference Person Reference Person 75+ Single Person 65+ Home ownership 84% 85% 76% Govt. pension is main income 58% 75% 76% Govt. pension is >90% income 35% 51% 53% Number of persons in household % of population 8.2% 6.0% 3.4% Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution and author's calculations

12 Assets of the Average Retired Household Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution and author's calculations

13 Equity Holdings Plenary

14 Asset Allocation across selected countries Source: Towers Watson, Global Pension Assets Study 2012, Published January 2012.

15 DB/DC Split across selected counties Source: Towers Watson, Global Pension Assets Study 2012, Published January 2012.

16 Retirement Strategies Plenary

17 Should DB and DC have similar equity exposure? Retirement income (Corporate) DB Independent of investment outcomes DC Linked to investment outcomes Risk management Hedge future defined benefits Hedge future consumption uncertainties Main risk bearer Sponsor Member Shadow assets Corporate equity Member net worth, human capital & Age Pension

18 Allocated pension vs life annuity and equity exposure Allocated Pension Life Annuity Retirement income Dependent on investment returns during retirement Dependent on interest rates at retirement Investment horizon Expected date of death Expected date of retirement Liability hedged portfolio Diversified mix of assets Bond with matched duration

19 Trustee Responsibilities Plenary

20 Trustee obligations under MySuper To manage the assets of the trust on behalf of its beneficiaries and in the beneficiaries best interests. includes consideration of the level of investment risk appropriate to members may consider the age as well as other relevant factors Source: Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 and Explanatory Memorandum

21 Other relevant factors Value of claim on AP dominates balance in super for the average retiree When govt. pensions > 90% of gross income, shares and own incorporated business assets represent 12% of non-super financial assets compared with 60% when govt. pensions < 1% of gross income The value to a member of the part-ap compared with the value of full-ap is greater than their current percentage of AP entitlement Income from the full AP is relatively uncorrelated with risky assets while income from the part AP is negatively correlated with risky assets Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution

22 Assets of the Average Retired Household Super Net Worth excl. own home Net Worth + Age Pension 0 Households Households 75+ Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution

23 Equity Exposure of the Average Retired Household 60% 50% 40% 30% 20% 10% 0% Households Households 75+ Super Net Worth excl. own home Net Worth + Age Pension Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution and author's calculations

24 Summary Most Australian retirees rely on the Age Pension as their main source of income in retirement The AP is a government guaranteed life annuity with a PV to retirees exceeding the value of their superannuation savings The majority of retirees have limited exposure to equities in their non-super assets Equity exposure of around 50% in super implies only about a 20% exposure across the portfolio of super, non-super and the AP for the average retiree.

25 Disclaimer: I am not a Vinva employee or consultant and have no formal role at Vinva although I have a small shareholding in the firm. These are personal views [prepared for the CMSF conference in March 2013] and not necessarily the views of anyone at Vinva.' Plenary

26 Questions and Discussion Plenary