The latest superannuation-performance statistics makes for depressing reading. According to Superratings, the industry analysts, the most recent five-year figures are the worst since compulsory Super was introduced in 1992.
The median balanced fund returned just 0.92 per cent a year for the past five years which, as news reports are already pointing out, equates to a negative real return once inflation is taken into account.
Over the same period, the Consumer Price Index (CPI), the measure of the cost of living, averaged about three per cent a year, meaning an annual loss for fund members of about two per cent, as inflation eats into the purchasing power of their savings. (More From Yahoo!7 Finance: Highest Paying Jobs in Australia)
It could get worse
Extrapolated across the industry, the amounts are staggering: a two per cent fall in purchasing power spread across the near trillion dollars in balanced super funds equates to a $20billion loss each year, or $100billion over the five years to the end of September.
And of course it could get worse. The crisis spreading throughout Europe could yet bring a double- dip recession to many economies there, and also in the US.
And however much we bang on about Australia depending more on China than we do on other developed economies for our prosperity, China is not immune to these developments. Europe is China's biggest export partner and its willingness to lend money to Europe to keep the economies going is a bit like Harvey Norman offering cheap finance to its customers. They'd rather lend them money to keep business ticking over than see it grind to a halt. (More From David Koch: Cash In On The Volatile Market)
Is super a bad idea?
But let's focus again on the super performance. Does this latest set of dreadful figures mean that Super is a bad idea?
In my view, no, far from it.
Remember, the statistics do not reflect the fact that all super contributions are only taxed at 15 per cent, saving investors up to 30 per cent in tax. (More From Yahoo!7 Finance: Top 10 Highest Paid Government Leaders)
More to the point, however, is the question of whether these big, managed funds are appropriate for today's workers – especially those who are less than happy to take big risks? Balanced funds contain 70-80 per cent of Australia's entire super savings and these funds still have the majority of their money invested in equities. And while history suggests that equities do well over the long term, there have been protracted periods where equities did very badly indeed. The UK's FTSE100 Index is still more than 20 per cent below its peak of just under 7,000 reached in 1999 and the US stockmarket is also below its peak, hit in 2000 just before the tech bubble burst. That's 11 or 12 years of volatility with no growth.
A dead decade
Australia is faring better but that's not to say we don't have a considerable period of flat stock market performance ahead of us. Our benchmark indices are at levels we first passed through in 2006 and if we fail to bounce from here we could quite easily join the UK and US in suffering a dead decade on our share markets. And with so many people set to retire within the next five years as our baby boomers hit retirement age, record numbers of people may have to make big changes to their retirement plans.
I've heard various people calling for super to contain more fixed interest and corporate bonds in their retirement portfolios, and I can see their point. (More From David Koch: How To Take Advantage Of An Interest Rate Cut)
Corporate bonds in particular pay quite handsome yields and also promise to pay the initial investment in full at the end of the term, which might be one or three or five or even 10 years.
Some certainty
Now, while the returns may not be the big double digits we were getting on super until a few years ago, it does at least give you some certainty. You would know how much money you are going to get each year and when you were going to get your capital back. There is a lot to say for that kind of transparency when everything else is so difficult to predict.
And while I welcome the recent changes to Super taxation to ensure that low earners also get a tax kick out of Super, you do have to ask if people with such little cash going towards their retirement should really be invested so heavily in shares. (More From Yahoo!7 Finance: Countries With The Highest Taxes)
The government has just changed the law so that anybody earning less than $37,500 will get not have to pay any tax at all on their super contributions, saving them up to $500 a year.
Rich man's tax rort
It was this anomaly that led to so much of the criticism of Super as a rich man's tax rort whilst low earners were simply forced into investments that they didn't necessarily want, for no tax benefit at all.
The changes will benefit over 1.1million people. The question is, will that money be simply lost in a flatlining stock market? (More From David Koch: Carbon Tax Facts)
Against this backdrop its little wonder we're seeing such a rush of people switching to DIY super funds, which give investors full control over their retirement savings. Self-managed-super funds allow you to mix a far broader spread of assets in the one fund. Within an SMSF, you might hold cash, shares, bonds, even property, all together. But with a big managed fund, you generally have to choose one specific sector and leave the investment decisions to somebody else.
The bottom line
It's increasingly questionable whether our big funds are diversified enough for low-income, Mum and Dad investors.
The rush to DIY super is sending a very clear message: people want more control over their money. (More From Yahoo!7 Finance: Riskiest Places To Use Your Credit Card)
