TONY EASTLEY:
Over the next few days many Australians, especially those close to retirement, will be receiving some expected, but decided gloomy financial news in the post.
Superannuation returns have taken their biggest annual hit in 20 years with some funds shedding as much as 10 per cent, because of the sinking share market.
To discuss the outlook for retirement nest eggs, I'm joined now in the studio by our business editor Peter Ryan.
Good morning Peter. How bad is the outlook for superannuation funds and the people in them?
PETER RYAN:
Well Tony it's very gloomy when you look at the last financial year in isolation and we're in for the worst returns since compulsory employer superannuation was introduced in 1992. According to super ratings, retail super funds will post an average loss of 9.8 per cent, with industry funds slightly better off, down 5.7 per cent. The best result was a 1.7 per cent loss for Vision Super, but none of the 50 funds rated, ended up in positive territory.
Now this is the result of sinking share markets around the world, because of the subprime mortgage meltdown in the United States and, of course, Australia hasn't been spared. That sinking feeling is a big concern for the Federal Government which has seen the end of boom times and the beginning of a bear market.
But the Superannuation Minister Senator Nick Sherry told me a short time ago, there's no need for panic and that superannuation is a long-term investment.
NICK SHERRY:
We know that the impact of the US subprime and the financial crisis has hurt the Australian markets. It's had a significant impact. We're not immune from that. And as a consequence, the rate of return for members in superannuation funds, over the last year, will be negative. However, in the longer term, superannuation funds, the longer term being five to seven years or more, have shown a very good, positive rate of return.
PETER RYAN:
Even so, this is going to come as a major shock for many people, particularly those close to retirement. What's your advice to them as they go to the mail box over the next few days?
NICK SHERRY:
Look, I would accept that there are many people who have never before experienced a negative rate of return. There are probably millions of Australians who have never seen their fund statement show the end balance less than the opening balance and effectively their superannuation account has gone backwards. I'd accept it's far deeper and far wider than we've ever seen, certainly ever seen in the 20 years of the compulsory system.
What is important is that the five, the five to seven year rate of return is usually published in the annual report with the fund statement. It's very important to have a look at that medium to longer term rate of return. For example, a dollar in superannuation six years ago, would have been worth a $1.70 a year ago. And that's now dropped back to $1.60, but you still had good growth. A dollar in super six years ago, is worth $1.60 today, so you still would have enjoyed good growth, a good rate of return over the last five to seven years.
TONY EASTLEY:
The Superannuation Minister Senator Nick Sherry there.
Peter Ryan, you've mentioned a better outcome for industry funds, over the retail funds. Explain that.
PETER RYAN:
Well Tony, we've seen that retail funds receive fees and commissions from super funds. For example, a report by Rainmaker Research showed financial advisers were paid $2.4 billion in fees and commissions in 2007 by super funds and this came as the share market peaked and then started to fall steadily. Industry super funds have been campaigning on this for several years, given that the fees and commissions go into the pockets of advisers and don't guarantee a better return. So people are being advised to take a very close look at the fees and to decide whether or not they're worth it. And Senator Nick Sherry has said he'd like to see the average fee fall to below one per cent.
TONY EASTLEY:
Now Peter, while we digest those super fund results, there are more bad tidings from Wall Street this morning, as if people didn't have enough bad news.
PETER RYAN:
That's right, it keeps coming. US stocks have plunged around two per cent this morning, with the Dow Jones industrial average closing 239 points weaker. Big financial stocks such as Merrill Lynch and the creaking mortgage giants Fannie Mae and Freddie Mac have dived once again, because of more gloomy news about the US economy. And with the housing slump in mind, America's second biggest telco Horizon has hit a two year low. That's because the housing slump means a bigger than estimated decrease in home telephone line connections.
TONY EASTLEY:
Business editor Peter Ryan, thanks for joining me.