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.
The ASFA Retirement Standard states that an average Australian couple requires about A$640,000 in their superannuation fund at retirement (or AUD 545,000 for a single person) to live comfortably. According to Milliman’s Jeff Gebler and Wade Matterson, “The personalised nature of each superannuation member’s retirement journey means a one-size-fits-all approach simply cannot deliver the necessary information, products, and risk management strategies required to achieve everyone’s desired outcomes.”
In the article “Why the industry’s ‘comfortable retirement’ measures are wrong,” Gebler and Matterson discuss the need for enhanced benchmarks based on available data and communication strategies to deliver better financial outcomes that individuals can live with comfortably.
As Australia’s Baby Boomer generation continues to retire, the country’s superannuation system enters a drawdown stage. While super funds have focused on accumulation, new legislation will make it clear that their purpose is to provide retirees with income. Under that premise, Milliman’s Jeff Gebler explains why a new retirement consultant “with a new skill-set focused on the implications of drawdown” is needed.
The following excerpt highlights the necessary skill-set.
The modern retirement consultant will need to add and co-ordinate a broad mix of skills to meet the increasingly complex needs of the superannuation industry, including:
Funds have an increasing need for actuarial skills which can help them model member behaviour, changes in legislation and the impact of the Age Pension, risk management strategies, and post-retirement product design.
The business world is now awash with information thanks to advances in technology and affordability. The data scientist can analyse and turn this ‘big data’ into practical insights in areas such as membership, investments and risk.
Funds and asset consultants have tended to focus on long-term returns generated during the accumulation phase. However, changing demographics and legislation suggest funds should increasingly focus on the risks of drawdown such as volatility and potential capital losses. With this comes an expanding list of relevant asset classes, many of which (such as derivatives) are traditionally beyond the expertise or depth of existing asset consultants.
Behavioural finance and communications
Funds need to design their products and services taking into account the behavioural tendencies of older investors. For example, financial literacy scores naturally decline by about one percentage point each year after age 60 while older investors are more prone to ‘loss aversion’ than younger investors.
Older investors are highly engaged with their super, including through digital channels. Automated-advice provider Decimal recently released research showing that older investors were the most active users of its enterprise financial advice service.
Smart defaults, lifecycle investing, and target date funds have been widely discussed since the global financial crisis highlighted the flaws in the traditional asset allocation approaches adopted for superannuation fund members. Superannuation is a type of long-term investment arrangement designed to help individuals accumulate savings for their retirement. It is a government-mandated program in Australia, akin to North America’s 401(k) system.
A recent article authored by Wade Matterson entitled “Sci-fi super” discusses a new generation of lifecycle approaches that use cutting-edge technologies to strengthen investment strategies exposed by the global financial crisis.
Here is an excerpt:
…The next generation of life cycle funds has learned from the mistakes of the past and addressed them via the use of three key features or enhancements to the existing vehicle. They can best be described as:
• Proximity sensors – broader mandates or strategic asset allocation ranges that can take into account views with respect to asset valuations and seek to navigate through them.
• A traffic GPS system – this has been implemented through the adoption of glide paths that target levels of volatility, rather than equity/bond allocations.
• Air bags – installing explicit risk management through the use of approaches such as hedging or tail-risk strategies that are capable of dealing with unforeseen events when the risk is the greatest.
Milliman’s Financial Risk Management (FRM) practice has helped in the implementation of these concepts in lifecycle funds in the United States and is currently exploring other options to bring these ideas to defined contribution (DC) participants.