Funds prepare to review lifecycle products

Alice Uribe

By

19/09/2018

QSuper is planning the next iteration of its lifecycle superannuation product, with a long-term view to including gender for the first time, along with members’ salary contribution rates and time to retirement. The fund is seeking a level of customisation that its CIO, Brad Holzberger, said traditional default options are not able to provide.

“The product needs of a 60-year-old male vary starkly from that of a 25-year-old female, and the challenge of any default product – whether it is super, insurance or advice – is how to best meet both and everything in between,” Holzberger told Investment Magazine.

The $72 billion QSuper first introduced its lifecycle product in 2013, extending the factors determining members’ investment strategies beyond age to include account balances.

“We are already considering the next iteration of QSuper’s Lifetime product,” Holzberger said.

This comes after the Productivity Commission controversially questioned whether lifecycle investments should be allowed as a MySuper default option, on the basis that there is a large downside in terms of forgone returns from de-risking too early.

Rice Warner said in a recent analysis that while aspects of the PC’s findings were correct, they “should not lead to a ban on lifecycle investments”.

“Lifecycle does not need to be relegated to the dustbin. It just needs a redesign,” Rice Warner stated.

Other funds Investment Magazine contacted said they were also mulling changes to their lifecycle products.

A First State Super spokeswoman said the fund was reviewing its product, while Sunsuper head of product Shane Mather said it would conduct a review of its 5-year-old lifecycle product in the next 12 months.

“Sunsuper supports the use of lifecycle investment options for MySuper members, as our research indicated that a member’s investment risk appetite generally reduces as they approach retirement,” he said. “Sunsuper believes it is important that any transition of assets be done slowly over time, so that a member is not exposed to significant market timing risk should a large proportion of their account balance be moved at any one time.”

Chant West senior investment research manager Mano Mohankumar said an increasing amount of MySuper default money was now being directed into lifecycle products.

“While our growth category is still where most people have their super, a meaningful number are now in so-called lifecycle products,” Mohankumar said. “Most retail funds have adopted a lifecycle design for their default MySuper option.

“A few not-for-profit funds, including some larger ones, have also gone down the lifecycle path, so about a third of MySuper default money is now in a lifecycle product.”

While members of retail funds in lifecycle strategies are defaulted into an investment option based on when they were born, and remain in that cohort for their time in a fund unless they make a decision to change, profit-to-member funds have taken a different tack.

“In the not-for-profit model, members switch from one traditional risk category to another at particular ages,” Mohankumar explained. “While lifecycle is the most common MySuper default in the retail sector, most not-for-profit funds still use their traditional growth options for that default role.”

The traditional risk categories not-for-profit funds use are high growth, growth, balanced and conservative.

Product design plays an important part in lifecycle products, Mohankumar said.

“By product design, we mean how the fund changes members’ exposure to growth assets over time – what’s called their glide path.”

Holzberger said QSuper’s Lifetime product had “performed exactly as it was designed to in its first five years, and in line with QSuper’s modelling, to produce comparable returns for members across their working lives”.

“In its first five years, almost 80 per cent of our Lifetime members have had equal or higher annual asset-only returns when compared with our balanced fund,” he said. “The remaining older and higher-balanced members were deliberately de-risked to refocus their investment strategy on sustaining retirement income.

“By design, the full lifecycle of this investment strategy targets more aggressive, excess returns for younger, lower-balanced members, to allow for de-risking and protection when the member is closer to retirement with the most to lose.”

Mather said Sunsuper’s lifecycle investment strategy was designed to move a small portion of the member’s balance each month from age 55 and gradually move members from the fund’s balanced investment option to 90 per cent retirement investment option and 10 per cent cash investment option at age 65.

Mohankumar said it was difficult to compare retail funds’ age-based options with not-for-profit funds’ options, which are based on single risk categories.

“The past few years have seen strong performance from growth assets so, as you would expect, the options that have higher allocations to growth assets have done best,” he said. “Older members, those born in the 1960s or earlier, have underperformed traditional MySuper Growth options by some margin, because these older cohorts have taken on less risk.”

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