A world where animal spirits are running wild is also one that has temporarily divorced from fundamentals. Experience tells us this often doesn’t end well.Â
The wealth transfer from Baby Boomers to their offspring, which is in full swing, has got the taxman’s full attention, especially as it pertains to capital gains payments, trust structures and potential breaches of the Tax Act’s Division 7A.
How to construct a benchmark for retirement products
As super funds still struggle to build and manage their own better pension products, conscious of the ticking demographic clock, one of the key aspects to doing so will be the establishment of the most appropriate benchmark. Parametric runs through the possibilities.
In a brief research note, ‘Income Targeting in a Retirement Portfolio – too much, too little or just right?’ Parametric’s Raewyn Williams, the Australian managing director, research, and Josh McKenzie, Sydney-based analyst, say that funds have to determine what an “adequate” pension is before they answer the question as to how to deliver an adequate pension to their retired members.
The note considers how a hypothetical fund creating an income-targeted Australian equities strategy for its ‘CIPR’ (Comprehensive Income Product for Retirement) or choice offering could benchmark the yield outcomes of this portfolio in a way that helps answer the adequacy question.
“Retirement solutions are a new frontier for most funds,” they say. “[They] are not shackled by legacy products and not the focus of peer surveys or the APRA ‘heatmap’. It is a rich greenfield-type opportunity to get back to the specific needs and sensitivities of fund members and embrace problems not yet solved by the industry. It’s truly, a license to innovate.” The four benchmarking options canvassed, suggesting both portfolio yield and benchmark yield, are:
. The obvious and simple – dividends plus interest over average portfolio NAV for portfolio yield; and, dividends over average market cap (for, say an ASX 200 group of stocks) for benchmark yield
. Taking an important step forward, the addition of franking credits to each the portfolio yield and benchmark yield equations
. Or taking a different approach to get closer to the heart of what adequate means to a retired member, using likely investments retirees are known to make. This again uses dividends, interest and franking credits for portfolio yield but then considering three alternative benchmark yield calculations: A) average term deposit rate; B) interest, dividends and franking credits of the top 5 ASX stocks over average portfolio NAV; and C) average rental yield
. Or, for the most sophisticated and bespoke approach, use the same calculation for portfolio yield again but more personal benchmarks such as: A) standard age pension requirement over average account balance; B) x% of pre-retirement salary over average account balance; and, a ‘comfortable living’ salary over average account balance.
The paper says: “Our key message is that, as super funds develop and implement their retirement portfolios, they can do better than simply migrate mechanical accumulation portfolio-style yield benchmarks that, in truth, miss the mark for members.
“Now is the opportunity for super funds to think innovatively and define yield success in a way that more closely reflects what retired fund members would relate to and care about. The estimated 1.8 million members moving into and through retirement in the next five years hope it’s an opportunity that super funds don’t miss.”
– G.B.
