Research house Rice Warner has openly questioned whether superannuation funds should begin resetting the return expectations of members.
With difficult economic headwinds prevailing, Rice Warner is concerned superannuation funds have made a rod for their back by not re-establishing lower return expectations in their communications with members.
Since the GFC, the world has entered "very strange and uncharted economic times", typified by the issuance of bonds with negative coupons by several European countries.
Meanwhile, global debt sits at 225% of GDP at USD$184 trillion and the RBA cash rate is at a record low of 1%. According to Rice Warner, it all adds up to a "massive global economic experiment" and a murky future.
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"There will be a profound impact on investments for superannuation funds," the firm said.
"The equity risk premium has grown since the GFC and real asset values have grown as interest rates have fallen. Consequently, we have had ten years of strong returns which have been great for all members. But what of the next 10 years?"
With past performance no reliable indicator of a fund's future performance, Rice Warner noted "the best members can do" is consider the investment objective of their MySuper strategy.
"Many funds have a MySuper objective equal to an annual return of CPI + X% per annum over rolling 10-years. X is usually 3.5% to 4%. Most funds have held X as a constant for many years even though times are clearly changing," Rice Warner pointed out.
As mainstream funds enjoy a 10-year run of positive returns, the firm said it wondered whether their success had made funds "complacent" in the face higher risks of a downturn.
"Every year, we survey asset consultants and large funds about their expectations for all asset classes over the next decade," Rice Warner said.
"The expected outcomes have not changed much even from year to year, though economic circumstances have been different."
As a result, Rice Warner said super funds had failed to consider the impact of global economic crises, and posed whether it was time for members to be told their average returns were likely to be two percentage points below the level they're used to.
"Should funds be telling members that they are likely to average returns of 5% over the next decade, rather than the 7% to which members have become accustomed?" the firm asked.
"Should the targets be reset lower in an environment of extremely high real asset prices and a decline in world growth (and future profitability)?
"Should we consider whether 10 years of 'lower-for-longer' has expanded to permanently lower interest rates, and a different normal state?"
According to the researcher, super funds need to prepare members for "much lower" nominal returns and likelihood that they'll need to tolerate higher levels of volatility to have a "reasonable chance of achieving adequate long-term returns."