On average, choosing a growth-type option provides just one or two more years of retirement income than picking a conservative one, research has found.
The focus of the superannuation industry is increasingly on the retirement phase. The gradual maturing of the system alone means that more and more fund members are moving past the accumulation phase. Funds and policymakers are paying attention. Treasury has an exposure draft out discussing retirement income streams.
The Australian Centre for Financial Studies has been working on a program of research with AIST around retirement incomes. The current paper follows work on age of retirement, involuntary retirement, comprehensive income products, and expenditure in retirement. In the current round of research, we are looking at the impact of the choice of defaults on retirement income streams.
Our key finding is that the choice of default does not make much difference. On average, choosing a growth-type option provides just one or two years more income than picking a conservative one.
When we dig into the reasons, the main finding is that there is little difference between the performance of growth and conservative products on offer. Standard packages offered to retirees all produce similar expected returns. At this stage in the research, we have not looked at the impact of risk on the range of possible outcomes, but at least looking at the averages, we see little difference.
By way of contrast, we then look at the expected performance of 100 per cent bond portfolios and 100 per cent equities portfolios. The difference is quite stark. The pure bond portfolio is extinguished, on average, about 10 years earlier than a pure equities portfolio would be.
These results are important. Susan Thorp’s earlier research demonstrates that retirees should adopt quite aggressive portfolios. This is because the pension provides insurance on the downside. With this in place, retirees should invest aggressively, knowing they keep the upside and the government provides support in case the portfolio does poorly.
The big open question is why funds offer such conservative portfolios to their members. It may just be customer-driven. Left to themselves, individuals seem to make even more conservative choices than standard defaults.
Dr Rodney Maddock is professor, at Monash Business School, Monash University, and interim director at the Australian Centre for Financial Studies.
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