Friday, 11 December 2015

Part One

Last month we held a Q&A session with some of our regular blog commenters. It was a great discussion and it’s always valuable hearing what our members want to know more about. Here are some of the questions put to the Investments team, and our responses.

You talk about the low return environment at the moment and the current low levels of inflation and interest rates. How would the Balanced option perform in a high inflation environment?

In an environment where inflation is unexpectedly rising we would generally expect cash to perform well during the upward trend. Nominal bonds would perform poorly, whereas inflation-linked bonds would keep pace with the change in inflation. In a higher inflation scenario the performance of shares can be variable. Price increases may be passed through to customers, but low or negative real returns have been common in periods of high inflation in the case of shares. Unlisted assets such as certain types of infrastructure can also assist in managing inflation risk.

How do you protect members’ super against inflation?

Our ReadyMade options (Balanced, Moderate and Aggressive) and the Lifetime option are reasonably well hedged against inflation. Inflation risk is managed in several ways. For one thing we continue to build a bespoke portfolio of unlisted assets with strong links to Australian inflation (particularly infrastructure and real estate assets). As we build these portfolios out we will also increase our hedge to inflation in other economies. We can also invest in commodities which are often protected against inflation that is caused by supply shocks.

Within the fixed interest allocation we can invest in inflation-linked bonds which means the income received from these assets can keep pace with inflation. Within our Ready Made options we buy inflation-linked bonds opportunistically where inflation expectations appear mispriced. This is undertaken opportunistically because we would effectively pay an insurance premium to move from nominal exposure to inflation-linked bonds (as we are effectively buying inflation protection). For the Lifetime option the focus is on hedging cashflow ‘to’ retirement. Therefore inflation-linked bonds are used as a hedging tool to lock in as far as possible, the purchasing power of future dollars regardless of movements of markets in the interim. For Lifetime members in the Focus or Sustain groups the allocation to inflation hedging instruments, such as inflation-linked bonds or cash, will often be materially higher than the Balanced option.

Inflation is one of the biggest risks we manage with the ReadyMade and Lifetime options on your behalf and one which we all face in maintaining a stable level of real income from our retirement savings. The steady rise in the price of goods and services over time can erode the purchasing power of a fixed sum of money.

Higher inflation can occur for several reasons. Structural inflation can occur due to disconnect between wages growth and employment. And there are also inflation shocks which can be brought about by a sudden change in supply of key materials such as oil.

QSuper has a range of tools at its disposal to protect against unexpectedly higher inflation. The effectiveness of these tools will depend on the nature of the shock, hence the need for different types of investments.

Why is there a $50,000 minimum account balance requirement to use Self Invest?

The minimum balanced requirement to use Self Invest is in place to capture the target market we thought would be most interested in using this option. Self Invest is designed for members who have a desire to take a greater level of control over where a part of their super is invested. As with any self-directed investment option, the freedom to make investment decisions comes with the responsibility to ensure these meet members’ own investment objectives. To an extent the eligibility criteria and limits applied to Self Invest also reflects this additional responsibility.

In addition there are limits around a minimum initial transfer into Self Invest. This limit is in place to ensure a sufficient balance is held in the option to cover the costs associated with an account of this type, such as fees and brokerage costs. The minimum amounts required to remain in an Accumulation and Income accounts after transferring into Self Invest are to cover insurance premiums and pension payments respectively.

The account balance criteria and investment limits as they apply to Self Invest are as follows:

  Accumulation account Income account
Account balance eligibility $50,000 $50,000
Minimum initial transfer to the Self
Invest transaction account
$5.000  $5,000
Minimum amount you must keep in
the other QSuper investment options
$10,000 24 months of your current 
Income account payment.

What is QSuper’s involvement in public policy debate around superannuation?

QSuper is active in public policy debate around system reform and we have provided submissions to various inquiries and commissions. Primarily what we advocate for on behalf of our members, is a system which is:

  • Sustainable – is configured to achieve its objectives over the longer term
  • Equitable – is fair and equitable for all users of the system
  • Stable – while accepting a natural level of evolution, that users of the system can have confidence the system is not subjected unnecessarily to changed.

For example we view a lifetime cap on the amount of superannuation an individual can contribute as one way to assist in closing the gender gap in terms of superannuation balances upon retirement.

So there you have it. A taste for some of the questions our regular bloggers asked of us. You can check out more questions from our members next week in the second of our Q&A posts. And of course you can ask us any questions you may have at any time through this blog. 

The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only. You should get professional advice before relying on this information.

Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.