Peter Costello weighs in on Super returns..

Peter Costello’s warning about a new era of low super fund returns has sparked a fierce debate over assumptions ­behind the government’s budget superannuation changes. “The 10-year bond rate is the lowest it has ever been and even 30-year bond rates are a bit over 3 per cent,’’ the former treasurer said yesterday. “It is a much lower-­return world than most of us have lived through in our lives.”

Assistant Treasurer Kelly O’Dwyer said the government’s claim that a $1.6 million pension pot would support an income stream of about four times the age pension ($88,000 a year) was based on returns of 3 per cent above inflation, over 25 years. “Over a lifetime it is assumed that retirees will draw down on the capital in their superannuation ­account — which is why there are minimum drawdown requirements,” Ms O’Dwyer said.

Given the single Age Pension is just over $22,000 a year, the calculation assumes an investor in a super fund would receive a guaranteed return of about 5.2 per cent a year.

Mr Costello, the chairman of the Future Fund, believed the government would agree to lowering the fund’s return target of 5 per cent above inflation. The alternative would be for the fund to take on more risk to achieve the target.

Mr Costello said he was not planning to enter the debate on the government’s super changes but was just outlining the fact that investors faced a new era of lower returns than they received in the past. “We used to live in a world where the long-term bond rate was 5.5 per cent and people could expect to get several basis points above that from their investments,’’ he said. “That world has gone. It’s past. The world we are looking at now is a long-term 2-3 per cent risk-free return world.”

AMP Capital chief economist Shane Oliver agreed with Mr Costello’s argument on the outlook for investment returns, particularly given the fact that retirees invested with a more conservative investment strategy.

But David Knox, senior partner with consultancy Mercer, which advises the super industry, said an estimated rate of return of about 5.5 per cent for a person in retirement was reasonable if it was taken over the longer term. “We have very low interest rates at the moment but when we model expected returns we do it over 20, 30 and 40 years. And 5.5 per cent is probably reasonable,’’ he said.

SuperRatings chairman Jeff Bresnahan said a return of about 5.5 per cent was “more than achievable over the long term” ­assuming a long-term inflation rate of about 2 per cent. “Peter Costello is on the wrong track on this one,” he said. “Budget strategies are based on long-term assumptions and so they should be.’’

The discussion comes amid the release of figures from super ­researchers Chant West yesterday which said super funds “were sitting on” returns of about 3 per cent for the financial year to date.  “Following a rise of 1.8 per cent in March, the median growth fund gained another 1.4 per cent in April,’’ Chant West director Warren Chant said. “That takes the return over the 10 months of the financial year to 1.7 per cent.”