Understanding AvSuper’s cash investments
Understanding AvSuper’s cash investments
Cash is usually the first investment consideration for trustees and members, and provides a modest return to members. Depending on the state of the economy, it is usually a rather small return, so on its own, it is unlikely that cash investments will help you reach your retirement savings target or maintain your savings (while in retirement). The main factor affecting the returns for members in this option is the current level of short term interest rates in Australia (rates are set by the Reserve Bank of Australia).
The main reason that cash earns such low returns (relative to other investments) is because it carries lower risk and appears safe. It’s generally considered to be a no loss investment as you do not expect to receive negative returns. The main way people can lose with investing in just cash, is through inflation; if you are earning 2% annually in cash while the annual inflation rate is 3%, you are actually losing money as your purchasing power is eroded.
How does AvSuper utilise cash investments overall?
Cash plays an important role in AvSuper’s investment portfolio. We use cash investments to manage cash flows into and out of other asset classes, and to pay for the Fund’s operating fees and expenses. We also need to ensure that we have enough liquid cash available to pay regular pension payments from our income stream division and to pay other withdrawals and benefits from the Fund. As a result, up to 10% of the Fund’s overall assets are invested in cash at any given time.
Typically, AvSuper’s cash investments aim to provide income, liquidity and relatively low but stable returns by investing in a range of short-term money market investments (that usually mature in 12 months or less).
By comparison there are some cash options in other superannuation funds called ‘cash enhanced’ or ‘cash plus’ options which sometimes include higher risk debt instruments such as fixed income securities, promissory notes, bank issued certificates of deposit and other medium-term interest bearing securities including derivative contracts.
The Trustee has determined ‘cash enhanced’ or ‘cash plus’ products are not suitable for our cash portfolio, despite the possibility of higher returns. For example, during the GFC, many other superannuation funds found that the riskier assets commonly found in cash enhanced “type” products were less liquid than imagined, resulting in many reporting “negative cash returns” and members actually losing money in these options. By not investing in these products, AvSuper was able to protect those of our members investing in AvSuper’s Cash Investment option from negative returns during the GFC.
About AvSuper’s Cash Investment Option
If you have investments in AvSuper’s Cash Investment Option, then you can be assured that your money is invested in low-risk, liquid cash instruments and can be easily accessed when you need to switch it or withdraw from the option.
The majority of the Cash Investment option is invested in the BlackRock Cash Fund with the remainder in longer duration (usually 6 to 24 months) term deposits with Australian Banks.
BlackRock Cash Fund uses a low-risk approach to invest in a diversified pool of only the most liquid short-term Australian money-market securities. The strategy is restricted to bank and corporate securities with a short-term credit rating of at least A1, while most of the investments are rated A1+, the highest-possible short-term rating.
A portfolio of bank term deposits also plays an effective role in the Cash Investment option and AvSuper is currently investing at attractive interest rates on offer from a number of financial institutions across a range of different terms. The rates for institutions (such as superannuation funds and other large investors) are not always the same as those available for private investors with smaller sums to invest. The Trustee believes term deposits are likely to remain attractive as a cash investment in the short term.
Term deposits offer higher returns than traditional bank accounts to compensate for the “lock up” of your investment for a set period of time. Breaking any “lock up” period or term generally involves a break cost which will may erode your interest gained over the period concerned. In comparison, shorter term cash instruments or ordinary bank account deposits will have usually returned a lower rate of interest/ return.
ASIC provides a guide on term deposits, along with the advice that term deposits need to be monitored to manage the associated risks – that is, don’t just ‘set and forget’ about money in any term deposit.
Investment earnings to non-pension accounts are taxed at 15%. In most cases, this can be reduced with capital gains tax offsets, however this does not apply to the Cash Option. This means the effective rate of tax in this option is 15% for Accumulation accounts (not Income Streams). This tax is deducted before unit prices are set each week for non-pension accounts and is reflected in the investment performance.
The right Cash choice for you…
Obviously, the level of income from cash investments varies as interest rates move up and down. It also depends on the types and maturities of securities and assets held in cash.
Cash investments are low risk but also low return, so these investments are not designed to meet the growth needs of members still saving for their retirement, although they can play an important part in many members’ overall investment strategy. Further, with an aging population and the lengthening of time most Australians will spend in retirement, it’s becoming increasingly difficult to see how consistent low returns from cash investments will help members maintain their standard of living in retirement. Please ensure you seek the right advice before making your choices.
Thinking of transferring some or all of your super to cash?
Make sure you have considered all the issues and risks. Consider your risk appetite and investment horizon. Call us for personalised financial advice on your AvSuper investment option if you think you need to. Also remember that:
- Cash is usually considered by investors who have an investment timeframe of less than a year, want to protect the value of their investment and who are willing to accept very little real growth. You may preserve capital by allocating some of your super to cash but there is a risk you may not keep pace with the impact of inflation
- If you are transferring from other AvSuper investment options with exposure to share markets while markets are down, you may crystallise losses on your investment. Worse, if there is a strong rebound in share markets after you transfer, you are likely to miss out on that recovery.
If you have an AvSuper accumulation account or income stream account, you can choose how your super is invested, allowing you to influence your investment risk to suit your needs and situation. There are eight investment options to choose from (including Cash as one of three specific asset class options), and you can choose more than one investment option for your money. You can invest your current balance differently to any future contributions.
The best option for you depends on your investment objectives, investment timeframe, age, attitude to investment risk and personal circumstances. Please note that past performance is not always indicative of future performance.
Email: firstname.lastname@example.org | Freecall: 1800 805 088 | Phone: 02 6268 5073 | www.avsuper.com.au
This information is of a general nature only and does not take into account your personal objectives, situation or needs. Before making a decision about AvSuper, you should consider your own requirements and the relevant Product Disclosure Statement (PDS). For a copy call us or visit the AvSuper website, www.avsuper.com.au. AvSuper Pty Ltd (ABN 46 050 431 797, AFSL 239078) is the Trustee of the AvSuper Fund (ABN 84 421 446 069). FS5002.7 12.2015