Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
AustralianSuper wants its members to have an ‘account for life’
AustralianSuper wants to give its members an “account for life”, help them apply for the age pension and create more integration between those two income streams to ease their journey into and through retirement.
Research the fund conducted with its members found a recurring pain point: their accumulation account largely functioned as an autopilot, but when it came time to retire they suddenly found themselves at the controls.
“The default settings work extremely well in accumulation, where all the decisions are made for members but they still have choice and flexibility,” AustralianSuper retirement chief Shawn Blackmore tells ISN. “Then they hit this junction of retirement where all of a sudden the tables are turned and all the decisions are on them. That’s really a pain point for our members.”
With an account for life the member will “always pull the trigger or tick the box” to start receiving income – a fund can’t default a member into receiving it – but they’ll keep their membership number and will have a more bespoke experience as a result of the clearer picture the fund has of them. It won’t entail mass investment customization in the vein of lifecycle products, but will lift some of the administrative burden on both sides of the relationship and allow members to draw an income while still contributing without the need to hold a separate accumulation account. Removing that “junction” will also make membership stickier, creating a powerful benefit for any fund that implements it.
“We listened to members and heard quite clearly the question of why they had to reapply to be a member. Why is this point important, how can I just continue the membership? That got us really thinking about this part of the journey…. There’s just some barriers that have gotten in the way as the ecosystem changed.”
Blackmore says that the account for life fits with changing ideas about retirement, where members very rarely drop out of the workforce completely. Of members that are now receiving income from the fund, around 10 per cent are still contributing to an accumulation account and many believe they’ll re-enter the workforce.
A broad church
Blackmore and his team of nine work in the fund’s retirement “domain” with another 50 or 60 personnel focussed on retirement in the product, communications and advice team. That’s relatively small compared to the vast retirement divisions of some of the other megafunds, but Blackmore doesn’t think that’s an obstacle to good outcomes if they get the strategic thinking right.
“It’s really exciting, and because it’s so early in the process of these operating model changes I don’t think anybody’s got the final balance right; there are going to be different aspects to fund thinking about how they work through this. Some funds have the product team under their retirement group; we don’t, but we work quite closely with the product team. It’ll be interesting to see how it changes as funds uplift the resourcing.”
On the product front, AustralianSuper is in the final stages of selecting a partner for the creation of its longevity risk solution to help members suffering from FORO (fear of running out). It aims to be in the market with that product late this calendar year.
“It’s important that offering gives members the confidence they won’t outlive their monies,” Blackmore says. “But we don’t believe it should be a default product, and it isn’t necessarily for all members… A lot of the members’ journey going into retirement is around psychology, and we know from listening to members that anxiety is something that comes up when they’re thinking about retirement.
“That’s natural; it’s hard to plan for the next 30 years, and part of our job is to remind them that they’ve been through this process: when you were 18 you didn’t know what life would look like at 50, but it’s going to be alright and we’ll be by your side.”
But is it possible for a megafund with three million members to build the ‘perfect’ retirement solution? Blackmore says the fund will come close, but needs to cater to a “broad church”.
“We’ve got members with a diverse range of needs and we don’t build bespoke, so we want to make sure that we build things that are important to the membership as a whole and not focus too much on a cohort as we go through.”
“But it’s still important we get close to the member as we build out our data and our journeys for members, that they see themselves in that journey; the worst thing we could do is have a member that doesn’t feel they’re getting a personal experience from AustralianSuper – that we’ve become too large and distant.”
