Investors in conservative super investment options could be facing years of lower returns as funds slash their return targets amid low interest rates and a scarcity of yield.

Major Australian super funds including Cbus have been cutting their return targets for investment options with more than 60% in defensive assets since 2016, data from superannuation research house SuperRatings shows. These targets set the returns member can expect their money to earn.

SuperRatings analyst Joshua Lowen says superannuation funds are being forced to review the likelihood that they can meet their investment objectives in a world of low interest rates.

“The prospect of an ongoing low interest rate environment has resulted in many funds reviewing the probability of meeting their stated objectives,” he says. “This is especially apparent for options where the majority of assets are allocated to traditionally defensive asset classes."

Cbus Super is among those who've made the shift. The fund has cut the return target for its “Conservative” option twice since 2019, cumulatively going from 1.75% to 1% above inflation.

Cbus head of portfolio management Mark Ferguson says the fund’s hand was forced by low interest rates and the likelihood that they won’t lift meaningfully anytime soon.

“Even pre-covid it was clear the longer-term environment was very much a lower rates for longer type one,” he says.

“The onset of covid has just exacerbated that situation. Arguably, I would call it now even lower for even longer.”

In September, Aware Super, Australia’s second largest super fund according to Canstar, told members it would no longer try to outperform the index for its cash investment option. It now aims to “meet or exceed” the benchmark.

Aware attributed the changes to low rates. In a statement to Morningstar, Aware said cash assets faced a “challenging return environment".

Decades of falling interest rates have squeezed the returns out of fixed interest and cash around the world. Australian 10-year government bonds yielded just 1.8% on Tuesday and the Reserve Bank’s cash rate has been below 2% for more than five years.

Conservative options are among the stable of investments that super funds offer members. Where growth options have large equity allocations, lower risk alternatives hold anywhere between 60% and 100% of their portfolios in cash and bonds. These options are suitable for investors seeking to preserve capital, often as they approach retirement.

But where members are moving large balances into conservative options prior to retirement, these minor changes to returns can add up. For a member with a balance of $700,000, were returns to be 0.5% lower, it would mean $40,000 less over a decade, according to Morningstar calculations.

The moves come as super funds try to reign in member expectations after a record-beating year. The post-covid boom in equity markets saw retirement savings swell across all investment options.

The Cbus MySuper option—which is split 70/30 between growth and defensive assets—returned 19.34% in FY 2021 while its Conservative option added 6.77%.

Chief investment officer at Australian Super, Mark Delaney, warned last month that the “perfect” returns of FY 2021 could not last and investors needed to accept that returns would be lower in the future.

Super funds are following through on the warnings. In the last 18 months, return targets were cut for a third of all “capital stable” options, which invest between 60% and 80% in defensive assets, according to SuperRatings. The same occurred for a fifth of all “secure” options, those with more than 80% in defensive assets.

The post-covid moves continue a longer trend. Since 2016, Australian super funds cut the return targets for 47% of “capital stable” and 34% of “secure” investment options.

Funds balance more risk versus more education

Superannuation funds are responding to the problem of low interest rates differently, says Lowen.

While many are slashing return objectives, others are choosing to add growth assets to their conservative options, he says. A smaller number are warning members that years with negative returns are now likely.

Maintaining return targets by adding more growth assets to conservative portfolios could put members least able to manage a capital loss at risk of just that, says Ferguson.

“You’re risking adverse outcomes for members who don’t have the risk appetite,” he says.

The alternative is for funds to educate members on what’s a reasonable return for holding cash and bonds.

Aware Super wrote to members with high cash allocations earlier this year about the low returns they were facing and whether their choices were appropriate for their retirement goals.

“We can’t do much about the fact that rates are where they are,” says Ferguson.

“And the member education piece is to say that there’s no magic answer.”