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Investors warned to brace for more bad news -

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Investors warned to brace for more bad news

Broadcast: 19/02/2009

Reporter: Greg Hoy

The number of Australians applying for the pension has soared in the past year as the global
financial crisis continues to eat into the investments and incomes of elderly Australians. And with
further declines in the performance of superannuation funds in the last month, analysts are warning
investors to brace themselves for another year of negative returns.

Transcript

KERRY O'BRIEN, PRESENTER: First to the predicament of retirees and would-be retirees as the global
financial crisis continues to impact on superannuation funds and other investments.

For instance, according to revised Treasury estimates the number of Australians applying for the
pension has soared by 64,000 in the past year.

The Federal Government has also now been forced to relax rules requiring retirees to withdraw an
increasing percentage of their retirement savings as they get older, which will only add to the
numbers who will qualify for the pension.

And to make matters worse, financial analysts are warning investors should brace for another year
of negative returns.

This grim outlook is causing considerable consternation and introspection across the superannuation
sector.

Business editor Greg Hoy reports.

GREG HOY, REPORTER: On anxious markets in the year of the Ox, with the bulls in retreat and the
bears in control, they are now on the lookout for black swans.

ANDREW BOAL, MANAGING DIRECTOR, WATSON WYATT AUSTRALIA: Everybody in the world thought that all
swans in the world were white, until they... into a new place and all of a sudden there was a black
swan and it was completely unexpected.

And so in the markets events like that will still occur from time to time and you can be totally
unprepared for those.

GREG HOY: Andrew Boal runs the 'Thinking Ahead Group' for investment consultants Watson Wyatt,
advising clients including Australia's Future Fund, who together hold investments worth in excess
of $200 billion.

ANDREW BOAL: The whole credit crisis... it was very difficult for even people close to that
situation to understand the implications of what was going on.

But really that credit crisis in the US and the sub-prime crisis that developed over a number of
years was the black swan event that were now still trying to recover from.

BOB PARTINGTON: My savings have gone down about 40 per cent. So the capital I had there for my
retirement has basically evaporated over the last 14 months.

GREG HOY: Bob Partington self manages his own super fund. Such funds are often recommended by
financial advisors and overseen by their preferred consultants or accountants.

They are the fastest growing superannuation sector in Australia and some say the hardest it by the
global financial crisis.

FIONA REYNOLDS, INSTITUTE OF SUPERANNUATION TRUSTEES: They're the people who are saying we've lost
40, 50 per cent of our retirement.

They are the people who chose to manage their retirement savings themselves though, and I'm
being... speaking generally, not every single person has.

So I think it's those self funded retirees who have suffered the most.

GREG HOY: Like so many Australians, 60-year-old Bob Partington postponed his retirement plans.

BOB PARTINGTON: There's those that are yet to retire, they're probably five years away, they can
ride this out. They're not a problem, in five years time it will recover.

It's the people now facing the decision, 'What do I do now?', if they retire now they realise
losses. So effectively, we're a group of self funded retirees that really have to go back to the
work place and keep working.

GREG HOY: The headache for the Government is just as its promised to increase payments to
pensioners the number of Australians applying for the pension has risen steadily as the global
credit crisis continues.

From October to December last year the number of applicants climbed from 2,000 a week to 3,000 a
week. Globally pension funds have suffered a 29 per cent fall on average in 2008.

Locally losses have been more like 20 per cent on average, though benchmark funds slid a further
4.4 per cent this year alone.

The share market meantime has fallen a whopping 40 per cent, which contributed to a loss of
confidence in the stock market by the big funds and in superannuation generally by many of their
members.

FIONA REYNOLDS: The questions that we are getting are about the compulsory system. Can it deliver?
Should it still be here? People are calling it into question.

So we keep trying to focus on the long term. When you sign up to a fund a fund tells you their long
term objective is for them to earn CPI plus three per cent, and the best performing funds are doing
that.

DAVID ANDERSON, MERCER WEALTH SOLUTIONS: We surveyed 1,000 working Australians, and a lot of people
are expecting to be worse off in retirement than they are now.

GREG HOY: Meantime, the gap between the best and worst performing funds continues to widen.

With the not for profit industry funds crowing their returns are superior to retail funds, who both
charge higher fees and are recommended by fee charging financial advisors, who are then paid
commissions by funds they refer clients to.

FIONA REYNOLDS: Members of not for profit funds have had the best returns.

GARRY WEAVEN, CHAIRMAN, INDUSTRY FUNDS MANAGEMENT (National Press Club, February 4): In recent
years billions of dollars have flowed into the retail funds, and the self managed fund or do it
yourself super sector, as they call it.

Almost all of that has been driven by the advice industry and a huge proportion of it is
underperforming.

DAVID ANDERSON: Just like any industry, any profession, there are those people that do it really,
really well and there are those people that don't do it well.

GARRY WEAVEN (National Press Club, February 4): Significantly, not one retail balanced fund was in
the top 10 in one year, three year or five year return period.

ANDREW BOAL: Industry funds and many of them have been much earlier to move into alternative
investments like infrastructure, and have been much more heavily invested in direct property.

And historically, that's had one huge impact on the variance and returns.

GARRY WEAVEN (National Press Club, February 4): The Government should move to outlaw commission
based selling of superannuation product, and to require by law financial planners and accountants
to act only in the best interests of their clients.

GREG HOY: Would you have a view on that at all?

DAVID ANDERSON: Well, Mercer's view is that individuals need help, and they professional help with
matters which can be very complex. And financial advisors are the best equipped to provide that
help.

ANDREW BOAL: Funds are...have historically both here... and in Australia and globally have been
focussing on the stock market too much for their investment market returns historically, and so we
have seen some diversification into alternative assets.

DAVID ANDERSON: From riskier asset classes, so shares and property if you like, to the more stable
asset classes, such as fixed income securities, bank deposits, cash.

ANDREW BOAL: 10 years ago we would have seen tradition al superannuation funds investing 40 per
cent in Australian stock market and 20 per cent in overseas stock markets, a total of 60 per cent
or more in the stock market.

A lot of cases that's reduced back to 35 or 40 per cent, and then investing the balance back into
bonds and alternative assets we've talked about before.

GREG HOY: Bad news, it would appear, for the share market, and it could get worse some analysts
fear as many prominent and indebted companies in the credit crisis are forced to compete to issue
discounted shares to raise capital.

ROGER MONTGOMERY, CLIME ASSET MANAGEMENT: They want to pay down the debt so they're diluting
shareholders. So, the two most important inputs into the calculation of a value for a company have
declined.

That means the value of Australian businesses is lower; it means a deferral of any sustained
recovery in the share prices of these companies,

And so in aggregate what shareholders are going to suffer from is a prolonged period of
unsustainable... if there are rallies, unsustainable rallies, and a prolonged period of sideways
and low share prices.

GREG HOY: So many are keeping their money in their pockets for now, morale is so low, but the wise
owls know it may not come in the Year of the Ox.

But the next black swan may literally bring good fortune, frightening off the gloom, the bears,
heralding the return of the bountiful bulls to the market.

FIONA REYNOLDS: I think, yes, there will be a crisis for some time in people's minds about whether
they should get back into the stock market, but I'm quite confident that that will also recover as
well.

KERRY O'BRIEN: Greg Hoy with that report.