Pension fund members suffered in the December quarter, as continued weakness in sharemarkets worldwide ate into their account balances. While their investments may have been somewhat lower risk than those of active super members, they still recorded negative returns for the quarter and for the 2008 calendar year.

While some pension members – especially those working with financial advisers – decide on their own investment mix, others opt for their fund’s default option. Roughly 60% of the funds in our database use the same default option for pension members as for super members, and this is typically a Growth option with 61 to 80% in growth assets, mainly shares. The other 40% of funds have a more conservative default for pension members, typically a Conservative Growth option (21 to 40% growth assets).

While most pension money does appear to be in Growth-style options, there is a case for these members (all aged 55 or over by definition) to consider a less aggressive investment mix. While their investment timeframe might still be quite long, they generally don’t have the capacity to top up their savings from fresh contributions. A serious market downturn, coupled with the regular withdrawal of pension payments, can deplete their capital to the point where their future financial wellbeing is irrevocably compromised.

Those members in Conservative Growth certainly fared better than their higher risk counterparts in 2008, but that did not spare them completely from the market woes. As with the Growth options, asset allocation was vital. Even within the Conservative Growth universe, the performance gap between the best and the worst was a full 14% for the year, mainly accounted for by the funds’ different exposures to listed markets.

Listed Australian and international (unhedged) share markets recorded -38.9% and -24.9% for the year, respectively. Property markets were even worse, with listed Australian property recording -55.3% and international property -45.7%. In contrast, Australian unlisted property delivered a negative return of just 0.3% (which included -4% for the month of December).

Defensive assets, and especially conventional Government bonds, performed well in a relative and absolute sense. Australian and international bonds (hedged) recorded positive returns of 14.9% and 9.2%, respectively. The relatively high exposure of Conservative Growth options to these sectors provided some defence for investors, but not enough to outweigh the savage losses in growth assets.

Table 1 compares the median performance for each category in Chant West’s Pension Performance Survey – ranging from All Growth to Conservative Growth. As expected, the returns were progressively worse the higher the allocation to growth assets.

Table 2 shows the median performance to the end of December of the Conservative Growth options of industry funds and master trusts. Over the year, the difference between the two groups was about 3%, which is considerably higher than the historical average of about 1% to 1.5% per annum. The main reason for this blowout in the performance gap is that industry funds generally have higher weightings to unlisted assets – about 17% versus 4% for master trusts – and unlisted asset returns have been far stronger (or less weak) than those of listed assets.

Table 3 shows the top 10 performing Conservative Growth funds based on 1 year returns to the end of December 2008. Apart from the returns, we have shown each fund’s weighting to unlisted assets. It is noteworthy that of the top 10 funds, 8 are industry funds, one is a public sector fund and only one is a master trust.

When we look at pension products, it is important to note that their performance is not the same as that of the corresponding super products. The reason is largely due to tax – or rather the absence of tax. While investment returns on accumulation assets are subject to 15% income tax and 10% long term capital gains tax, pension assets are not subject to any tax at all.

When markets are rising, pension assets generally grow faster than accumulation assets. Conversely, when markets are falling, pension returns tend to be a little lower. The reason is that, unlike super funds, pension funds are unable to cushion their losses by offsetting them against taxable gains.