Life-cycle funds boost retirement income: MercerBY MARK SMITH | TUESDAY, 4 DEC 2012 10:50AMAdding a whole of life age-based investment default option to superannuation funds would reduce investment risk and help restore confidence in the Australian super system, according to Mercer's David Anderson. |
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Age based Lifecycle funds major drawback is they simply reduce risk at the expense of return using one factor - Age. Two members of the same age often have vastly different risk profiles/retirement prospects. For trustees looking at long-term strategy for their Funds this leads to lower FUM and growth rates over time compared to peers. What's need is a more 'efficient' model.
Fortunately the MySuper Lifecycle legislation allows for the use of more factors than age - one of these may well be projected retirement lifestyle/balance. Using multiple factors enables two 25 year olds, one expected to retire on a million and the other on the pension to be automatically invested in different asset allocations. Using this approach higher retirement balances for members and hence higher FUM for trustees on average can be achieved compared to the Default Option, while aligning member's asset allocation with their age and retirement prospects.
David Anderson is correct that the theory is straightforward and that the product must be mass tailored to each fund and its members. However implementation is not complex - it just requires trustees to use the information already held by in their own member databases. Trustee Tailored Super (www.trusteetailored.com) is an automated patented method for achieving this improved risk/return outcome - not a Default Option not an Age Base Lifecycle Option but a new more efficient approach.