What Risks Maybe Inside An Australian Expats Superannuation Fund?
We often hear Australian expats taking the age-old set and forget approach when it comes to their superannuation so today we wanted to run through what risks you maybe exposed to in an Australian expats superannuation fund. They know they can’t touch it for years, so why bother looking into it before they jet off or even while they are abroad. Sometimes we hear of the avid Australian expat who will go the extra mile and at least do a quick consolidation of their super funds because if you have had more than one job, you most likely have more than one super fund. These days super funds do make it quite easy and convenient to consolidate your accounts with just a push of a button once you are logged onto your member account.
When Is a Balanced Fund Not a Balanced Fund?
A recent article out of the Australian Financial Review(AFR) has shone some light on how our superannuation is invested and potentially exposing you to investment risk that you may not have been aware of. It points out the lack of transparency that members face when it comes to knowing where their super is invested and what the actual level of risk members take on by being in specific a investment option (i.e. Balanced, Growth and High Growth).
The low-interest rate environment has created a situation where super funds are investing in unlisted investments to increase their potential returns for members. Unfortunately, when it comes to these types of alternative assets, there can be huge discrepancies in classifications. The view of these super funds is that AAA grade government and corporate bonds don’t offer high enough returns and therefore they’ve switched into higher yielding but much riskier assets such as unlisted property and infrastructure.
Once super funds have made such investment changes in their portfolios, they need to identify whether they categorise these investments as growth or defensive assets. The primary concern here is that super funds with significantly large exposures to these unclassified asset types are deeming them to be defensive assets, when in fact they are on the opposite end of the scale.
According to the AFR, industry insiders confirm that this isn’t just an accidental oversight on the administration side but in fact, there are considerable incentives for investment managers of super funds to adopt this approach. This is very alarming when we consider that there is roughly AUD$2.5 trillion in our superannuation system.
So What Does This Really Mean for An Australian Expats Superannuation Fund?
An Australian expat investing in a balanced fund (which, depending on the research firm, is usually defined as between 60 and 80 percent of growth assets), could have more than 90 percent of their super savings invested in riskier assets, without them having the faintest idea of how much risk is being taken. More can be read here.
Furthermore, due to the lack of reporting it can make it increasingly difficult to compare super funds, as one cannot compare apples to apples. If a defensive option is outperforming another super funds growth option, there could be some serious discrepancies in the transparency of where that super fund is actually investing its members funds. Australian expats who leave their superannuation in good faith to their ‘reliable’ industry super fund need to be more proactive in how and where their super is being invested and whether it is in line with their retirement goals or investment time horizon.
Is The Insurance Cover Valid Inside an Australian Expats Superannuation Fund?
Another area Australian expats need to be aware of is the default cover they hold in their super funds. Recent cases have shown that 65% of super funds default insurance cover won’t cover you once you go overseas for an extended period of time over 90 days. This is of great concern because it means an expat could pay for 5 to 10 years worth of premiums while overseas only to find out that their insurance was invalidated in the first few months abroad. This means thousands of dollars in wasted premiums have come out of their super balance for no reason. A staggering number of just over 880,000 Aussie expats was recorded at the end of 2016, which would equate to billions of dollars in the superannuation system.
If you want transparency in where your superannuation is invested it is always best to seek professional advice from a qualified financial planner. Too often people have great intentions to seek advice on how to plan for their retirement but fail to do so as they are caught up in the busyness of their lives. An hour today of planning can equate to 15 years in retirement.