A key architect of the compulsory retirement savings system lauds its many achievements, stretching from the national economy to the individual. Where it’s double faulting is in serving members – and it needs to be addressed promptly.
With performance and diversification driving demand, these funds are expected to experience four-fold global growth over the next decade to nearly $AU65 trillion.
When to de-risk proving a roadblock for life-cycle super strategies
Life-cycle strategies, investment options based on a person’s age, were introduced just over a decade ago with the introduction of MySuper. If you were 25, for example, growth assets would have a far more prominent role in your portfolio compared with somebody aged 55.
You then automatically shift into different life-cycle options as you age without having to make active choices about how your superannuation is allocated.
“With the introduction of MySuper in January 2014, we saw a number of organisations introduce a life-cycle strategy. Since then, not many have subsequently switched from a balanced option to a life-cycle strategy,” senior investment research manager at Chant West, Mano Mohankumar (pictured), says.
QSuper, which is now part of the Australian Retirement Trust, was one of the first to do this in 2013 and QSuper Lifetime is still its default option for members.
It offers four options – Outlook for those under 45, Aspire for ages 45 to 49, Focus for those aged 50 to 59 and Sustain for those aged over 60. Within those options asset allocations may differ, depending on the size of the balance.
One of the biggest challenges for funds offering life-cycle options has been determining at what age members should start to de-risk. Given people are living longer and keeping their super funds in the system longer, opinion around appropriate risk levels has changed markedly in the past decade.
“There were flaws in the early iterations of life-cycle strategies, and, at a higher level, it was really just de-risking too early. Over the years, there have been enhancements over time, and it’s just maintaining that higher allocation of growth assets for longer,” Mohankumar says.
“Typically, today, you would be in a portfolio where you have 90 per cent in growth assets up until age 50 or 55 in some cases, and then you de-risk over time. By age 65 you’d be down to about 65 per cent growth assets. Whereas, if you went back 11 years ago, de-risking probably started in your early 40s, in some cases even 30s, and then you were down to 70 per cent growth by your late 40s, and then by 65 down to about 45 per cent growth.”
Mohankumar suspects it’s the difficult question of working out when a strategy should de-risk that has stopped more funds from offering life-cycle options.
There are also difficulties in communicating what these options are. While Chant West looks at life-cycle options in its performance tables, it doesn’t include them in its media releases anymore because they weren’t getting any coverage.
“It was quite hard for media to articulate, which I totally understand because your return journey depends on what age you are, so how do you summarise that in an article,” he says.
Chant West is supportive of the changes to life-cycle strategy asset allocations but is not overly optimistic that other funds will be rushing to offer them anytime soon.
“It hasn’t happened yet. The first part of it makes a lot of sense, doesn’t it? Younger members [have] got long investment horizons, 90 per cent in growth assets make sense, but philosophically, you must decide when you start de-risking your members. And I think that’s the key reason why some funds think, well, we feel more comfortable with our members being in a 70/30 or a 75/25 default,” Mohankumar says.
Head of research at Chant West parent Zenith, Grant Kennaway, points out the Australian approach is the direct opposite to the US.
“In the US all the money is in the target date. It’s one area where we completely disconnect. It’s driven by the employers in the US, and they’ve gone down the route of the best interests of our members is this [target date] approach,” Kennaway says.
Sequencing risk is another obvious risk to life-cycle strategies that makes member communication around these strategies critical.
“If you do have a life-cycle strategy, you really need to make sure you get the messaging out to your members,” Mohankumar says.
