Examining the equity holdings of Australian Super Funds Too high, too low or just right?
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
Sources of Investment Returns Plenary
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
Australian Government Real Interest Rates Source: Reserve Bank of Australia Statistical Tables. Capital Market Yields, Government Bonds, Indexed.
The Age Pension Plenary
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); $1,050,000 (Part) Source: Australian Government Department of Human Services, Intergenerational Report 2010 and Rice Warner, Touchstone August 2012, "Reforming the Age Pension.
Value of Age Pension ($ 000): g = 1.6% pa and r = 1.5% pa Age Female Male Couple Couple per person 35 381 310 599 299 45 381 312 597 299 55 384 318 601 301 65 436 377 678 339 75 268 226 424 212 85 132 113 219 109 Source: Australian Bureau of Statistics, Life Tables Australia 2009-11 and author's calculations
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% 35 381 270 163 117 45 381 291 198 153 55 384 318 243 203 65 436 394 343 314 75 268 250 227 213 85 132 127 120 115 Source: Australian Bureau of Statistics, Life Tables Australia 2009-11 and author's calculations
Sources of Retirement Income Plenary
Characteristics of Retired Households Reference Person 65-74 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 1.9 1.4 1.0 % of population 8.2% 6.0% 3.4% Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution 2009-10 and author's calculations
Assets of the Average Retired Household Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution 2009-10 and author's calculations
Equity Holdings Plenary
Asset Allocation across selected countries Source: Towers Watson, Global Pension Assets Study 2012, Published January 2012.
DB/DC Split across selected counties Source: Towers Watson, Global Pension Assets Study 2012, Published January 2012.
Retirement Strategies Plenary
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
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
Trustee Responsibilities Plenary
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
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 2009-10
Assets of the Average Retired Household 1000 800 600 400 200 Super Net Worth excl. own home Net Worth + Age Pension 0 Households 65-74 Households 75+ Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution 2009-10
Equity Exposure of the Average Retired Household 60% 50% 40% 30% 20% 10% 0% Households 65-74 Households 75+ Super Net Worth excl. own home Net Worth + Age Pension Source: Australian Bureau of Statistics, Household Wealth and Wealth Distribution 2009-10 and author's calculations
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.
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
Questions and Discussion Plenary