<em>Illustration: John Spooner</em>

Illustration: John Spooner

Yippee! Super funds returned almost 4 per cent in the three months to the end of February. As the typical ''balanced'' investment option has about half of its money in shares, it is the performance of the sharemarkets that should be cheered. It's the same with the average annual return on the typical balanced investment option of 0.66 over five years. The poor long-term results are mostly due to shares.

The debate over whether the heavy tilt towards shares in default funds is too risky sprang to life again recently after the former Treasury secretary, Ken Henry, said superannuation funds invested too heavily in shares.

He said funds should put more of the money into conservative assets. The call came after David Murray, who has recently stepped down as the chairman of the Future Fund, made similar comments.

Henry said he had wanted super funds to invest more heavily in bank debt at the height of the global financial crisis.

His efforts failed because of the belief that shares performed better than debt over the long term and will do so again.

The typical balanced investment option has about 50 per cent of its funds invested in shares, the highest in the OECD. Australian funds also have the lowest exposure to fixed income, such as bonds.

However, most of the superannuation industry - the trustees of the funds and their consultants - still think shares are the way to go.

In fact, it may be a good time to be increasing exposure to shares, given that most are cheap and the obstacles to a sustained recovery on sharemarkets have receded somewhat. Those obstacles include agreement on Europe's second Greek bailout, better economic data from the US and fewer worries about China. On the other hand, there are plenty of market-watchers who think economic growth in most of the developed world will be below its long-term level for years to come because of their sovereign debt problems. That may put a lid on how well sharemarkets in developed countries will perform.

But piling into fixed-interest markets may not provide much of a solution, either.

Fixed-interest investments do not appear to be particularly good value, because their prices have been driven higher since the financial crisis by people buying them as a safe haven.

While a big tilt to shares still makes sense for younger superannuation members who have decades ahead of them before they stop working and retire, it's a harder argument to make for older fund members who are on the brink of retirement and will need to live off their retirement savings.

Anyone for whom retirement is not far off is likely to struggle to recover the losses sustained during the financial crisis. To repair their account balances they will need to make large personal contributions to their super but for many, super excess caps limit how far they can go.

Pre-retirement baby boomers also need to check whether their fund's ''balanced'' investment option is really the appropriate place to be to protect them from further losses.

That means checking on the asset allocation and how much of their money is directed to shares.