Good question. When you look beneath the surface of the Account Based Pensions offered by major superannuation funds, the answer is “quite a lot”.
How well an Account Based Pension serves you depends on its returns, and the risks taken to get those returns. Any financial planner worth his or her fee can help you structure a portfolio that provides a risk/return trade-off that meets your needs, both initially and, most importantly, over the years
The major tool to manage risk is “asset allocation”. This is a simple idea, and it relates to how much you have in safe, low risk investments, such as term deposits, cash and short term Government bonds, compared with how much you have in more volatile (but potentially higher yielding) investments such as shares, and property.
Sounds simple. However there are some big problems when it comes to choosing an investment mix from the large superannuation funds.
The main problem arises from terminology. The options are variously described as “conservative”, “balanced”, “growth”, “high growth”, “conservative balanced”, and so on.
The problem is, there is no universal definition of these terms, and one may not be too far from the mark in suspecting that the terms are little more than marketing slogans.
On reading the Product Disclosure Statement of one large super fund (no names – there are many in this boat), I found that the actual asset allocations could fall within large bands. For example, in the case of the balanced option for their account based pension, exposure to Australian shares could range from, 10% to 40%, for international shares, from 10% to 40%, property from 0% to 25%, alternatives (whatever they are) from 0% to 55%, fixed interest from 5% to 35%, and cash from 0% to 30%.
It is then up to the investment manager to juggle the mix depending on how he or she sees the market. If they think shares are going to rise, they put more into shares. If they think shares will fall, they cut back. They repeat the process with other asset classes, and hence the overall balance of the portfolio changes.
If they get this process right, they will produce good results. However, picking such movements in advance is very difficult, and if they get it wrong (by, for example going heavily into shares ahead of a market correction), then the loss can be sizeable.
By working with a financial planner, you can take control of this important variable, and make sure that it meets your ongoing needs.
Large superannuation funds must try to meet the needs of thousands of members. However, they only know what these needs are in the broadest possible terms, which relate to no single member. A financial planner will design a portfolio that matches your specific, individual needs. The planner should then advise you on any necessary changes over the years as your circumstances change, and market conditions change.
