Super on target for new life stage
Tailored products aim to protect members from large losses before retirement, writes John Collett.
Tailored products aim to protect members from large losses before retirement, writes John Collett. The passing of the first tranche of the MySuper legislation by the lower house last week paves the way for employers to have lifestage investment options as the default options for new employees who do not choose who will manage their super.The new rules on super do not start until 2014, but more funds are planning to launch lifestage options in anticipation of the change.Under MySuper, super funds will be restricted to offering default options that have a broadly diversified investment strategy and low costs, but an amendment to the MySuper bill to allow lifestage options to become default options could be one of the biggest changes to come from the new rules.Target-date funds, as they are known in the US, automatically reduce risk as members age. In Australia they are known as lifestage or lifecycle options, but they work in much the same way.The Australian offerings have a "glide path" to retirement, where the asset allocation is tilted more conservatively as the fund member ages. They are a response to the GFC and the problems older fund members faced in default options which, despite being called "balanced funds", had high exposure to risky assets and left many members with hefty losses.Default options, where most fund members land if they don't choose an option, typically have exposures to "growth" assets - shares and property - of between 70 per cent and 80 per cent - one of the highest in the world. Lifestage options are designed to better manage the investment risk for older fund members.Funds that have lifestage strategies tend to take one of two approaches.One is to simply step fund members down when they reach the age of 50 from the balanced option that most fund members are in to one of the fund's more conservative options, and then to an even more conservative option from age 60.That is the route being taken by industry funds. Retail funds, on the other hand, tend to have the fund member remain in the one option, with its asset allocation made slightly more conservative each year. For example, someone born in the 1960s will be in BT's Super for Life - 1960s Lifestage Fund. Once a year, the asset allocation will change to a slightly lower allocation of growth assets and slightly more income-producing assets. The super fund may also adjust the asset allocation to reflect the outlook of the fund on investment markets.One of the oldest of this style of products, BT launched its Lifestage funds in 2007.A senior product manager for BT Super for Life, Martin Smith, says the 1960s Lifestage Fund has a growth-asset allocation of 72 per cent, with members aged between 43 and 52. The 1950s fund (53 to 62-year-olds) has a growth-asset allocation of 54 per cent.Hard to compareThe research manager at SuperRatings, Kirby Rappell, says it's hard to compare the performances of lifestage options as there are relatively few of them.He says this will change as moreare launched.Rappell says the lack of performance transparency means the onus is on funds to tell members frequently and meaningfully how the options are tracking.Australian super funds say they have designed the options to avoid problems experienced in the US, where they are promoted as "set and forget" investments.In the US, the "target date" refers to the year the fund member expects to retire. Before the global financial crisis, people expecting to retire in 2010 were in "Target Date 2010" funds. Big fund managers in the US offered them but there were huge differences in their asset allocations, with shares exposure of anywhere between 20 per cent and 80 per cent.Those with big exposure to shares suffered massive losses just before the members were hoping to retire. After an inquiry by the US Senate, regulators there are working on better industry standards and better disclosure of how the target-date funds invest.Not perfect"These ... funds are not perfection, you are still dealing with all of the imponderables of investment markets, but it has to be better than sticking everybody in the same bucket," says Jeremy Cooper, the chairman, retirement incomes, at Challenger.Cooper led a review of the superannuation system in 2010.The chief executive of the Australian Institute of Superannuation Fund Trustees, Fiona Reynolds, says that while only a minority of funds offer these products, she expects more to be launched, particularly with investment returns expected to remain volatile for some time.Reynolds and Cooper expect lifestage options will evolve into more sophisticated products that will consider a range of factors apart from just age, such as risk appetite, expected retirement date, financial-advice requirements and market conditions.Funds plan to include more information on annual statements to members, showing them how much income in retirement they are likely to have. That should prompt older fund members to take more interest in their super.A Nobel laureate in economics and a professor at the MIT Sloan School of Management, Robert C. Merton, said in Sydney last week that super funds should be giving members meaningful information on how well they are tracking to realise their retirement goals.He said members should receive regular updates on how they are tracking and whether they need to increase their contributions, work longer or increase their investment risk in the hope of higher returns.It would be akin to an annual check-up, he said.No substitute for good adviceWhile age is the most important factor in deciding which superannuation investment option is best, there are many other factors to be considered in selecting the right mix of assets for retirement savings.A financial planner with Paramount Wealth Management, Wayne Leggett, says fund members may have other investments that will be a source of income in retirement, and these have to be taken into account.People have different tolerances for investment risk and different expectations of their retirement years. He says the lifestage options are good as far as they go, but they will not replace the need for good advice tailored to individual needs.He compares lifestage options with the introduction of e-tax when when some people said taxpayers would not need accountants any more. Leggett says good planners start with the client's objectives and then work on how to achieve them."We build a portfolio based on the objectives and a clear goal, where the client understands the process involved," he says.