Sent: 03-02-2009 12:09:02
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An ugly problem rears its ugly head again
Some of you may remember an article that Peter Thornhill and I wrote for this free weekly email back in August 2002 about the excessive drawdown of allocated pensions. [Read it here: http://www.atcbiz.com.au/chroniclearticles.php?new=u2xcwd72&num=2 ]
The article came about because of bad investment experience and investors having to cash out units in managed funds in a down market.
As might have been expected this problem has reappeared in the current market conditions.
The same points that we made last year are still valid today. We argued that there needed to be much more aggressive income requirements managements in allocated pension type products.
It appears that over the last few years many financial planners have been trying to implement this for their clients. But this practice doesn't seem to have penetrated into the no advice investor market segment.
We further argued that there was a fundamental problem with total return style funds in account based pension products. This problem largely persists to today.
As we said, "you have two negatives hitting it at once ... one is the negative share price the other is the pension payments".
As a result we argued that investors need to have an income buffer to enable the smoother payment of income. Thornhill said, "I intend to always have the buffer there [in his allocated pension] as I hate the thought of being a distressed seller in duff markets. I'm not going to undo the habits of a lifetime!"
It is worth pointing out that at end of January the ASX 200 index lost 55% of its value between in the 2008 calendar year. However interestingly the level of dividends paid in the 2008 calendar year compared to the 2007 calendar year declined by 0.14%. And for the record this is before any franking credits might have been taken into account.
Some investors have gone public on their problems. A few have suggested that the required minimum pension amount should not be determined throughout the year but, in exceptional circumstances, there should be an ability for trustees to determine a revised pension amount.
Once investor said he had written to the Prime Minister and Minister for Superannuation some months ago about this idea but had not received a response.
I don't expect many fund managers would be keen to allow a readjustment to account based pension income during the year. The system changes would be quite painful.
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