Few would disagree that a strong regulator is required for a strong superannuation system. But APRA’s myopic focus on cost to members means its $70,000 Christmas party is unlikely to help its reputation.
Good investing requires real sacrifices, according to Oaktree’s Howard Marks, but you can’t expect to be compensated just for making them.
Rules for designing retirement incomes strategies
As the dust settles on the Government’s Retirement Income Review, the search for the most appropriate and cost-effective strategies for both large groups of people and individuals has resumed, aided by some new academic work which sets principles and rules for big super funds, financial advisers and product providers.
Geoff Warren, an associate professor at ANU and a former asset consultant, has written the summary guide in “Principles and Rules for Translating Retirement Objectives into Strategies” in association with two other ANU researchers, Adam Butt and Gaurav Khemka. It is a companion paper to a bigger more technical work published in January, called ‘Optimal Strategies for Retirees in Australia (with Realistic Risk Transfer)’
The ‘principles and rules’ paper is a practical guide based on academic research by the authors and other work by practitioners on the best strategies for retirees.
There are four principles outlined in the summary paper with 12 accompanying decision rules, plus two principles which are designed to moderate how the others are applied.
The paper generally recommends a blend of annuities alongside growth and defensive assets, depending on the individual’s tolerances and preferences. It suggests a preference for using annuities over fixed income for the defensive part of the portfolio.
The four principles are:
- Secure any minimum acceptable income, if possible
- If there is a target level of income, invest with the aim of delivering that target for as long as possible using a combination of annuities, growth and defensive assets. Then draw a sufficient amount to deliver the income target until available assets are exhausted
- If the aim is to convert assets into as much income as possible, the drawdown and investment strategy should be jointly directed at this goal while leaving behind no more assets than intended, and
- A strong bequest motive implies restricting drawdowns to tolerable levels and directing the investment strategy towards building assets.
The first decision rule, in order to secure a bare minimum acceptable income, is to purchase an annuity or sufficient annuities to cover this aim.
The four decision rules for an income target objective involve purchasing the annuities, with a recommended upper limit of 60 per cent, and then investing the remainder of the money in growth assets as far as can be tolerated.
The four decision rules for an income maximisation objective are: determine how much income to protect with annuities, invest the remainder with a preference for growth assets, establish an affordable drawdown strategy, and then review the drawdown strategy from time to time.
The final three decision rules are to do with bequests, which has become more of a political issue. For instance, Senator Hume, the minister for superannuation, told an industry gathering on January 28 that retirees should use their capital more efficiently, and spend more than their bare minimums.
The rules when there is a strong bequest motive are: use the annuities to secure a minimum acceptable income only, drawdown only what is needed, and, invest in growth assets as far as can be tolerated.
The final two principles – to do with implementation – involve risk tolerance. They suggest that an individual with a high risk tolerance should reduce annuity use in favour of traditional growth assets and use the opportunity to increase their expected income (or bequests); and, growth asset exposure should be maximised subject to tolerance for near-term volatility.
