The 3 ways energy costs are crunching self-funded retirees: CIO

By Lucy Dean

November 14 2017
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Self-funded retirees are “bearing the brunt” of high energy prices and a lack of bipartisan support for reform isn’t helping, the CIO of an advisory firm has said.

According to the chief investment officer at financial advisory firm, ipac, Jeff Rogers, rising energy costs mean self-funded retirees are being “crunched three ways”.

In an insight for AMP, Mr Rogers explained:

1. “Their cost of living is rising, which means retirees are drawing more cash flow from their superannuation investments to support their spending including paying energy bills.”

This number is usually around 10 per cent of retirees’ total consumption, according to the Association of Superannuation Funds of Australia Retirement Standard, he noted.

2. “Secondly, when we manage retirement income portfolios to fund these essential spending goals, we look for Australian companies with high and sustainable dividends,” he continued.

“But because many of these companies face higher energy input costs, their cash flows and dividend paying power are under threat.”

This means that the investment returns retirees may rely on are also damaged.

3. The ability for a fund manager to effectively hedge energy on the behalf of this group is also impacted, he said.

This is because of the “frequent” government policy changes over the last 10 years.

“If we could reallocate 5 per cent of the retiree’s portfolio from fixed income and invest it in new sustainable sources of electricity production, there would be an improvement in the stability of inflation-hedging cash flows from both parts of the portfolio as well as improved societal outcomes as a result.

“Risk adjusted portfolio returns might improve by 10-20 basis points, according to our own analysis, which corresponds to $500-$1,000 per annum for the retiree. But we can’t make this hedge.”

Why?

The problem is that there are “too many unknowns” and as some unknowns, like the company’s right to operate, taxes, access to research and development and social pressures, are quite significant.

It’s “too risky” to invest in infrastructure on retirees’ behalf “unless the rules of the game are widely agreed and sustainable”, he contended.

“The federal government’s latest policy – the National Energy Guarantee – may not garner the bipartisan support it needs without significant changes to emissions reductions targets, in part because there remain very wide-ranging opinions about climate change policy within the major parties.”

Continuing, he warned: “Such divergent policy (not to mention political opinions) means the appetite for companies exposed to power – be they major emitters or green companies – is diminished.”

Calling for a “stable set of rules” that is backed by both regulation and the community, he said that without it the risk to investors is “too high to justify the allocation of capital”.

“When it comes to decisions on energy investment, we [AMP Capital] are acutely aware of the need to consider the social licence to operate, now and well into the future,” he said, emphasising that this informs decisions around where to invest, how to engage with the investee companies and what it does with directly owned assets.

Noting that AMP Capital is “not alone” in taking this stance, he said “many” in the financial services sector believe there should be a fiduciary duty to maximise both shareholder welfare and shareholder value.

“Hence the increased focus on companies’ carbon footprint,” he elaborated. “Developing a bipartisan strategy to provide a reasonable trade-off between reliability, affordability and environmental sustainability in the energy sector may be challenging, but it is hopefully something our community leaders can do.”

Until then, he warned that super funds will not support new investment in electricity production in a significant way.

He concluded: “While this will affect the whole community, retirees are the cohort facing the most evident blow to their financial wellbeing.”

Speaking in September, the founder of Bloomberg New Energy Finance, Michael Liebreich said “many hundreds of billions” of investors’ dollars have been squandered due to investment decisions led by poor energy forecasts since September 2011.

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Retirement