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(May-2002) Crediting rates reveal a tight field
Super Review’s Top 300 survey reveals significant differences between the average earning rates of different funds in the year to June 2001, with corporate funds recording 6.22 per cent, industry funds 5.69 per cent and government funds 4.80 per cent.
However, an examination of crediting rates for the same period reveals a different story. Although corporate funds remained on top with 6.74 per cent, government and industry funds, which recorded 5.97 per cent and 5.94 per cent respectively, were close behind.
Director of research at Rainmaker Information, Alex Dunnin, explains that the reason for this is that corporate funds tend to be more proactive and aggressive compared to some of their counterparts and often top up crediting rates by using smoothing policies to enhance returns.
Dunnin says some government funds also carry reserves, and last year they used the reserves in a big way to ease the impact of falling international equity markets.
Executive chair of Industry Financial Services Gary Weaven says for all intents and purposes, many government funds function like industry funds because they are multi-employer schemes and have an accumulation fund.
“Defined benefit schemes can also take higher risks, as they don’t have to compete with anyone ... The rate of return is largely irrelevant for the membership because the company has to pick up the bill at the end of the day and pay the appropriate multiple as determined in the trust deed,” says Weaven.
Accumulation funds led the way in earnings rates, with an average of 6.12 per cent in the year ended June 2001, outperforming the 5.69 per cent from hybrid funds and the 4.26 per cent from defined benefit schemes. But again, the picture changes when crediting rates are considered. Accumulation funds credited members 6.19 per cent, hybrid funds 6.47 per cent and defined benefit funds only 5.53 per cent.
Weaven says part of the reason for these results are that industry funds and accumulation funds have “become a bit more confident in their investment positions” holding slightly higher weightings to growth assets.
Dunnin adds: “Defined benefit funds tend to be pretty high growth in orientation — high in international equities, low in bonds — and as the international equities sector got hit, the defined benefit sector got hit too ... It also puts a line through the notion that some actuaries say defined benefit funds always do better and while that may have been true in the past, I don’t know if it is true now.”
Mercer Human Resource Consulting principal Russell Mason adds that accumulation funds have an asset allocation of about 65 to 70 per cent towards growth and 30 to 35 per cent defensive, compared to defined benefit funds, which have a weighting closer to 80 per cent towards growth.
“More defined benefit funds would also have used three-year smoothing rate techniques for their interest rates, where accumulation funds tend to use actual earnings,” says Mason.
The average Top 300 earning rate of 5.68 per cent and crediting rate of 6.19 per cent for the year to June 2001 confirm that the days of double-digit growth are over.
Growth rates were affected by global economic pressures, particularly in the United States and Japan, and the flow-on effects from the technology meltdown in the first-half of 2000.
Overseas shares (as measured by the MSCI World Index ex-Australia) fell 16 per cent in local currency terms in the year to June 2001, compared to a 12.6 per cent rise the previous year. However, because the value of the Australian dollar fell during the same period, in Australian dollar terms the market fell only six per cent.
The Australian share market, unlike the international market, gained 9.1 per cent (as measured by the S&P ASX 200 Index) compared to a 15.1 per cent rise the previous year.
This volatility affected a number of the more aggressive investment options offered by super funds, including government scheme QSuper’s Accumulation account’s high growth option, which returned a crediting rate of -7.58 per cent, AGEST’s shares option with its -1.8 per cent and Local Authorities Super Fund’s Just shares option of -0.6 per cent.
Despite this, some super funds weathered the storm and credited members for the 2001 financial year with returns in excess of 10 per cent. Corporate funds dominate the overall TOP 10 crediting rate list, with the Orica Group Super Fund snaring second place after rewarding members with a crediting rate of 11.9 per cent. The NRMA, Unilever and Pacific Dunlop super plans shared fourth place with 11.5 per cent.
Commonwealth Bank Officers’Super fund, a defined benefit fund that had a crediting rate of 11 per cent, was assisted by the use of its three-year smoothing rate of return, a low exposure to international equities and the performance of its equities managers.
Westpac Staff Super Plan fund secretary Steve Whiteside also attributed his fund’s place in the TOP 10 to the use of its four-year smoothing policy.
While corporate funds may have secured seven out of the 10 positions, industry super fund giant REST dominates the TOP 10 list with three entries (see story below).
Nonetheless, Weaven reminds trustees of all funds to take a long-term view, even though it is often tempting to be concerned about the short-term market reaction. “It’s easy advice to give, but hard advice to follow,” adds Weaven.
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