Charging All The Way To The Bank

Sydney Morning Herald

Saturday June 14, 2008

Annette Sampson

What sort of return do you reckon you should be getting on your cash? Leaving aside those dud bank accounts paying 0.25 per cent or less, most people would nominate a rate of around 6 or 7 per cent. With the Reserve Bank's official cash rate at 7.25 per cent, the better online savings accounts are paying in excess of 7 per cent (some as much as 8 per cent) and the top cash management accounts more than 6 per cent.

If you're prepared to lock your money away for a short period, the returns can be even higher. Try around 8.25 per cent for a 90-day term deposit and up to 8.5 per cent for 180 days.

But if you want to put part, or all, of your super into cash, the options are not as clear cut. Several readers have emailed in recent weeks wanting to know how to get a better deal on the cash in their super funds. Why, they ask, are they forced to put up with returns of 4 per cent or less from their super funds when there are much better offers on the market?

It is a fair question. So let's deal with the obvious answers first. Even if your super and non-super money earned exactly the same rate, you'd be quoted a lower return from your super fund. This is because super funds report their returns after fees and taxes.

So if you invested $10,000 in cash in your super fund and earned a 7 per cent interest rate, you would pay 15 per cent tax on that $700 interest. That $105 impost would reduce your net interest to $595 or an after-tax rate of 5.95 per cent. Then there are the fees and other costs. Realistically, the less you can get away with here, the better. Despite what the fund managers might tell you, there is not a lot they can do to add value to cash investments. The returns tend to be fairly uniform, unless you are prepared to take on added risks. You'll still have to pay fees to cover the costs of running the fund, but you should not be paying big dollars for cash management.

Or so the theory goes. In practice fees on superannuation cash funds can vary dramatically. According to researcher Morningstar, the 157 retail cash options on its database have costs ranging from 0.29 per cent to 2.11 per cent. If you are in a large corporate super fund, or a not-for-profit fund like an industry fund, the fees should be much lower.

But even within these constraints, some super funds have been underperforming. SelectingSuper surveys the returns from the country's major super funds. It found the average cash return from these funds in the 12 months to April 30 was 4.6 per cent after fees and taxes. By comparison, the main bank bill indices (which cash funds tend to measure themselves against) returned around 7 per cent - 7.1 per cent for the UBS Australian bank bill index and the Reserve Bank's 90-day bill index, and 6.9 per cent for the Reserve Bank's 30-day bill index. The top performing cash option returned 7 per cent (after fees and taxes), and SelectingSuper's associate director of research, Andrew Keevers, says at least 50 funds managed more than 5 per cent. But at the other end of the scale, the poorest performer returned about 1.5 per cent and others were in the 2 to 3 per cent range. In the retail market, Morningstar's figures show returns for the year to May 31 ranged from 0.74 to 6.83 per cent.

None of the cash funds surveyed by either group lost money, as has occurred with some "cash enhanced funds" that openly admit to offering a higher risk/reward trade-off. But the lower returns from a sizeable group of cash funds suggest some have ventured outside the traditional holdings of cash and short term bank bills and have suffered for it. Funds that took on added risks, such as investing in corporate debt, have been more exposed to the credit crunch and have had to mark down the value of these investments.

Morningstar says it is important for investors to understand exactly what their cash fund invests in. While most would expect a straight cash fund to be extremely conservative in its asset choices, that may not always be the case.

But there is still the problem of what to do if your fund is not performing. The simplest and most attractive option for many investors would be to switch their super to an online savings account or term deposit where you know the rate, pay minimal fees, and do not have to worry about the underlying investments. And if you have a self-managed super fund, you can do just that.

Unfortunately other super funds do not tend to offer these options, which means these products are often only available as a non-super investment.

This week Russell Investment Management launched an integrated super and banking package where investors can choose the ANZ Prime Cash Management Account - paying 6.25 per cent - as one of their super investment options. The idea is that investors taking a pension can shift money into the CMA and access it as needed with an ATM or credit card. While the main appeal is added flexibility for pensioners, it lays the groundwork for further integration of super and banking products.

With more investors switching at least some of their savings to cash, the pressure is on super funds to pay more attention to this relatively neglected investment class. They need to offer a wider range of cash options and to offer better disclosure of where the money is invested and how this could affect returns. As one reader using a major industry fund pointed out, some recent cash returns cannot be explained away by fees and taxes alone.

© 2008 Sydney Morning Herald

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