Can your super fund collapse?

I am 52 years old and have all of my savings in super. Therefore most of this money is in shares, or other listed investments such as property securities and fixed interest. With all of this market turmoil, my question is: Can a super fund collapse? Should I be worried about having all of my savings in one super fund? And should I be doing anything to ensure that my super is safe in this environment?

Response:

Investors have been through considerable market turmoil over the last six months and more volatility can’t be ruled out. Investors go through all sorts of emotions (see below) when the market cycles, and the fear of loss is heightened in times like these.

The primary function of a superannuation fund is to hold and invest members’ monies on their behalf. Australians have hundreds of billions of dollars invested in superannuation, so super funds have an important role to play in financial markets. Basically, super is an attractive long-term investment that helps you save for retirement in a tax effective way.

Now, we can never say never in the investment world, however it is highly unlikely that your entire super fund can “collapse”, especially if it is properly diversified (you’ve already mentioned you hold shares, property and fixed interest) – meaning your money is spread between different investments. Let’s say your fund is held with ABC Super Fund. ABC is usually the trustee and/or administrator of the fund – not necessarily the investment manager. If ABC is a public company, the shareholders/owners of the business, provide money to run the company and this capital is held as the value of ABC shares.

Your money in super is entirely different. This is the money you have invested within the ABC Super Fund (one of the company’s products, not one of their assets – it’s held on trust for you) and it is held entirely separately from shareholder capital. Your money is also protected by strict regulation. And what happens to ABC’s share price has little or no direct impact on your money.

If ABC collapses, then largely, your diversified portfolio of other shares, property and fixed interest remains intact but XYZ might become the new product name/administrator of your super fund.

Having all your money in one well diversified fund should not be a major concern because it’s not all invested in one single share or property or generally managed by one manager. So, you can have one fund, but by no means are all your eggs in the one basket.

At times like these, you need to understand one of the most important investment rules, which is the relationship between risk and return. It’s based on the principle that asset classes with the greatest risk (such as shares and listed property) produce greater returns over the long term. However, in the short term they are likely to experience the greatest volatility in their returns. Less risky assets, such as cash and fixed interest, are less volatile but also produce lower returns in the long term.

Having an investment plan is one of the best ways to help you ride out volatility in the sharemarket and reduce the risk of you making rash decisions. Less experienced investors can be tempted to dive in and out of investments in the hope of making abnormal gains or protecting themselves from large losses.

With super, you ought to choose a long term investment strategy which can withstand inevitable crises whilst remaining consistent with your financial objectives and risk tolerance – eg: retiring at age 63. Then you should stick to this broad strategy even when surging share prices otherwise tempt you to consider a more aggressive approach or when plunging values might suck you into selling and adopting a highly defensive approach. If you are tempted to trade then you should do so on a contrarian basis – that is buy low and sell high – NOT the other way around.

Even the most experienced investors have difficulty picking the best time to buy and sell investments. It’s actually better to invest the same amount of money in superannuation at consistent intervals. This is called dollar cost averaging which helps smooth the fluctuations in entry prices. It also takes the emotion out of investing which is important during tumultuous market conditions.

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited | ABN 89 051 208 327 | AFS Licence No 232706.

Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.