A large number of super funds are running the same investment strategy in the retirement phase as they are in the accumulation phase, and that is a flawed strategy, says David Bell, chief investment officer of Mine Wealth + Wellbeing.
Super funds think in terms of pooling member money and trying to deliver outperformance in an efficient way from an administrative perspective, but there is so much more that super funds should be doing, Bell told delegates at the 8th annual Post Retirement Conference in Sydney.
“When we were preparing for this session Jeremy [Cooper] raised the issue, which I found a touch confronting, that … [CIOs] are focusing on investment solutions rather than focusing on holistic solutions which incorporate investment risk and mortality risk,” says Bell.
Jeremy Cooper, chair of retirement income at Challenger, who was on the panel with Bell, said the problem stemmed from Harry Markowitz’s modern portfolio theory, upon which the whole basis of Australia’s very high-quality accumulation phase of super was built.
“Much later in life Markowitz realised that this whole construct had nothing to do with retirement,” Cooper says. “It was all to do with having very large sums of money invested for very long periods of time. He had an epiphany later in life and realised the individualised members account draw down experience that we are all trying to deal with had nothing to do with the construct.”
He added one of the reasons the superannuation industry was moving slower in the post-retirement space is that the people who have been trained up in skills relating to accumulation have been incentivised to do that well.
“[Whereas] the retirement one is actually all upside down … the retirement thing is in retail experience. You’ve got somebody out there who wants something back from the fund. And I know that sounds so obvious that you think how infantile to say that, but it is very different.
“You have very strong incentives in the investment phases. Investment returns can solve all problems, so we’ll just get better and better at doing that. But when it comes to retirement how do you actually measure?
“It’s that philosophical stumbling point where we find ourselves.”
Michael Blayney, head of investment strategy at First State Super, says his fund, on the investment side, are on this journey of looking at better post-retirement solutions. He added mortality protection is part of that, but so too was having a smoother run with investments.
“Co-mingling allows us to have things like unlisted assets, particularly income-producing ones like unlisted property or infrastructure. Where we are effectively pooling the pre-retirement assets [with the post-retirement] enables … both a liquidity mechanism and critical mass.
“Those things can help to smooth the journey, because ultimately it’s a very stressful thing for a retiree to take on market risk when they no longer have the ability to earn the returns back.”
He added First State Super were looking at moving to a more objectives-based focus, and in fact they had a slice of the overall fund that is carved down on that basis, some of which is managed externally and some internally.
“We are also looking at how we can better tailor the building blocks. Ninety per cent of risk, in even a 50/50 balanced structure, comes from the equities. So we are looking at ways to tailor the equities to be lower risk.”
In Blayney’s view, the bit that investment people can’t solve is the longevity risk, but he wants to take a thoughtful approach to addressing it.
“If we think about it in the defined benefit context, for a defined benefit to be able to completely de-risk and liability match it needs an extremely strong funded status.
“If we think about the liability of our members as being their future expenses they need to live comfortably, I’d say the vast bulk of members in the system are underfunded, so we need to approach this as an underfunded problem.”