‘Come back when you’re grey’: Young people warned against super switching

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‘Come back when you’re grey’: Young people warned against super switching

By Simone Fox Koob

Super funds are warning younger members could be worse off if they move their money to conservative investment options, after new research showed an increase in the number of people considering switching amid a volatile global market.

A poll conducted for lobby group Industry Super Australia by UMR Strategic Research found that a third of industry fund members are considering switching in response to the latest market swings.

SuperRatings executive director Kirby Rappell said most young people wouldn’t have experienced the kind of market volatility we are currently experiencing.

SuperRatings executive director Kirby Rappell said most young people wouldn’t have experienced the kind of market volatility we are currently experiencing. Credit: Arsineh Houspian

One in five said they had switched to conservative options after the most recent downturn or during the downturn at the beginning of the pandemic, with 35 per cent of those people still not returning to their fund’s balanced option when economic conditions improved.

Those aged between 18 and 34 were the most likely to change investment options, the survey found, and they also switched in the greatest numbers during the downturns. Almost 40 per cent of this cohort said they are currently seriously considering switching.

“While it’s encouraging to see more members engage with super some are going a little overboard, over-reacting to market movements and economic announcements,” said Industry Super Australia chief executive Bernie Dean.

“Those who missed the market rebound after the COVID-19 downturn have already lost a five-figure sum. These losses could punch a big hole in their retirement savings.”

Super funds have a range of investment options that members can choose from. They hold various asset classes in differing proportions. Balanced options, which most fund members are invested in, are diversified to optimise the returns and risks.

For many in younger age groups, the recent market downturns have been the first time they’ve lived through the kind of volatility we are currently seeing, said SuperRatings executive director Kirby Rappell.

“Apart from a bit of a blip during the start of COVID, people have been pretty used to, for the last 15 years at least, markets generally moving up pretty consistently over time and probably not that much volatility,” he said.

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“A lot of volatility causes a lot of concern for people, but it’s also learning how to be able to just deal with it. Being alert, but not alarmed, is really important.”

It comes as most super funds are expected to deliver negative returns for the past financial year. Australia’s largest super fund, AustralianSuper, revealed last week it had recorded its first negative return since the global financial crisis.

Sam Sicilia, the chief investment officer of Hostplus, said if people switch their super investment options during market downturns, they then have another tricky decision to make - when to switch back.

“People miss the turning points, to the point where they think they can time the market, but in reality, very, very few people can and those that do it’s often just luck,” he said.

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“It’s like flipping a coin. You flip heads, you go, ‘How good is that?’ Another head, another head, eventually you’re going to flip a tail and hand all the money back. So the best thing to do if you’re young and there’s volatility is doing nothing. Just leave it there. Come back when you’re grey. That’s the best strategy. Do nothing in periods of volatility.”

Fund call centres were flooded with inquiries about switching from members during the meltdown in early 2020, when the benchmark S&P/ASX 200 Index fell more than 35 per cent in just 22 trading days.

SuperRatings found that a member who had a $100,000 balance and switched to cash from a growth or balanced option at the onset of the pandemic would be $35,000 to $45,000 worse off at the end of June this year.

Executives at other super funds warned young people against reacting with a sense of panic to short-term volatility.

Aware Super chief executive Deanne Stewart said that recently they had seen a small increase in switching, but much less than at the onset of the pandemic.

She said at the onset of the pandemic, Australian super funds saw a significant rise in the number of members switching to more conservative investment options, yet as markets recovered many were slow to switch back.

“They effectively locked in a loss,” she said. “In our case, when the pandemic started early in 2020, thousands of our members switched to the cash option. Six months after the sharemarket hit its low-point, two in every three of these members still hadn’t switched back to more growth-focused options. That means they missed much of the market recovery.”

Rest Super chief investment officer Andrew Lill said they had also seen a relatively small increase in the number of members switching to more conservative investment, but warned this could come at a cost to member’s ultimate retirement outcome if they mis-time the market.

They both encouraged members to speak to their fund if they were concerned.

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