The riddle of the superannuation system is that the needs of workers saving for retirement are relatively simple while the needs of retirees are incredibly complex. Those saving for retirement want to generate the highest long-term investment returns within certain tolerances for risk. Retirees want to generate the highest lifetime income possible with both certainty and flexibility.
Super fund trustees will soon need to balance these competing objectives thanks to a proposed Retirement Income Covenant. This covenant will codify their requirements and obligations to improve retirement outcomes for members.
The challenge for super fund trustees centres on Comprehensive Income Products for Retirement. Funds must take care in constructing a retirement income strategy, especially one that focusses on the “collective needs of members” as described in the covenant position paper.
To read more about the challenges facing trustees as they begin to grapple with the proposed Retirement Income Covenant, see this article by Milliman’s Jeff Gebler and Adam Shao.
Superannuation is one of the most valuable products working Australians own. Yet it’s one of the products they care least about.
Forcing people to buy a product when the value can’t be unlocked for many years is not a good starting point for engagement. Attempting to persuade members to save more super by using broad-based one-size-fits-all targets has failed.
But research suggests that when members are able to see their future selves in vivid and realistic detail, they are more willing to make choices today that may benefit them in the future. Super funds can play a role in connecting the two.
In this article, Milliman’s Jeff Gebler says that the super industry’s dominant comfortable retirement savings target is not indicative of who its members are or who they will become. He says that funds can help members see themselves in meaningful, positive terms, thus sparking genuine engagement and better long-term decisions.
More than half of Australian retirees are spending less than the Age Pension each year, raising significant questions about current retirement policy and super fund strategies, according to new research. The research suggests mandatory and voluntary measures to boost super funds may not be enough to produce improved retirement lifestyles without a deeper understanding of the motivations driving retiree behaviour. Milliman’s Jeff Gebler offers perspective in this article.
Lower investment return targets on top of higher investment risk can create disengaged investors in Australia’s superannuation industry. In this article, Milliman’s Michael Armitage offers perspective on how super funds can “pursue more innovative strategies to match risk and return to suit different groups” to meet the needs of individual investors.
Here’s an excerpt:
Older members and those with larger balances, who are more sensitive to risk (both volatility and maximum drawdown), need special attention.
Rather than automatically reduce investment return targets or increase investment risk, some funds are exploring alternative options beyond 70:30 style default funds. No single approach is perfect, but whatever strategies are chosen, they should ultimately increase the probability that members meet real (not assumed) goals.
The Future Fund may be a unique example (no members and no inflows), but it has taken a far more absolute return approach than typical super funds–even with the knowledge that government could start drawing down funds from 2020. Similarly, some super funds are taking a greater risk parity approach (that goes deeper than simply gearing up bonds) by focusing on the amount of risk in each portfolio allocation rather than the specific dollar amounts invested.
Maritime Super has also recognised the role of risk–last year, it applied a futures-based risk overlay (managed by Milliman) aimed at controlling extreme volatility and limiting capital losses to its default MySuper option. Its membership is older and has higher value balances than many other industry funds.
Other funds are now using futures to tilt their portfolio allocations based on relative valuations over the short term. This type of implementation management can potentially better manage risk and marginally improve returns.
These are just some of the innovations currently taking place as funds differentiate themselves and leave herding behaviour behind.