Posted June 04, 2018 06:31:49 Australian pension funds continue to pay high dividend yields, even as their stocks are underperforming and their asset allocation strategies are in a tizzy.
The latest figures from the Australian Securities and Investments Commission show that the majority of Australian pension fund managers have paid a premium to pay for more dividends, even after accounting for the fact that the value of their assets has fallen sharply.
The pension fund industry is also facing a major crisis in the stock market, with the benchmark S&P 500 index index down 7.9 per cent in 2018 and its latest quarterly profit down 9.3 per cent.
“The pension sector has been hit hard by the current economic downturn,” said Gary Pomerantz, chief economist at Macquarie Group.
“I think the problem is that pension funds are paying a premium for the benefits they’re receiving, and I think they’re not paying enough.”
Pensions are an important pillar of Australia’s economic future, with more than $10 trillion of investments and $12 trillion of assets invested in them, and they play a central role in the health of the economy and the economy as a whole.
A report released last year by the pension provider Commonwealth Trusts, called Pension Crisis: Why Australians Need Better Information on the Dividends Paid by Their Pensions, showed pension fund directors have paid out a total of $5.3 billion in dividends over the past five years.
At the same time, the S&s index of Australian stocks has plummeted 12 per cent this year, while the Australian dollar has lost more than 10 per cent against the US dollar.
Mr Pomeranz said there was a disconnect between what pension fund advisers were telling pensioners and what they were actually receiving in return.
Pension fund directors were still getting paid the dividends they were receiving, but pension fund investors weren’t receiving the dividends at the same level as pension fund companies were, he said.
But there was no reason to expect the pension funds to be paying dividends at such a high level, he added.
“I think it’s because they are trying to stay in business,” Mr Pomerants said.
“But you can’t expect the same amount of money to be delivered to a pension fund every quarter.”
Pension funds are also struggling to maintain their assets, with many failing to meet the benchmark target of a 5 per cent return.
A review by the Reserve Bank last year recommended a 10 per “full-year” capital increase for pension funds, which would mean a 20 per cent increase in assets.
And while some pension funds have made a profit for the past three years, they are still paying more than they should, with some funds making more than their liabilities.
The problem is there is no one-size-fits-all solution, Mr Pomorantz said.
“You can’t just go out and say that you need a capital increase every year.
You’ve got to look at what the risks are for a fund to be profitable,” he said, adding the current market environment has forced pension funds into more volatile markets.”
There’s a lot of volatility in the markets and you have to be able to make decisions on what to do.”
In addition, the retirement age has been set to rise from 65 to 67 in 2019, making the age of retirement even longer.
That means the retirement income of pensioners is already at a premium, but it could get worse, with those with lower incomes still paying the same pension fund dividends as those with higher incomes.
“What’s happening with the retirement payouts of pension funds is that their benefit package has not been adjusted to reflect that,” Mr Prima said.
While pensioners have been benefiting from a lower pension age, they may not be paying the dividends that they should be paying, as the retirement of the workforce continues to worsen.
Meanwhile, there is also a growing body of evidence suggesting that pensions could be over-valued in the long-term.
There is a growing concern that the pension fund sector is going through a structural transition, with rising costs and a slow rate of return on investment.
In particular, some of the most vulnerable members of the pension sector are in their 70s, 80s and 90s, and it’s important to consider the future impact of that on their pension funds.