Lifecycle not the answer: Rice Warner

  Rice Warner, Robert Merton and Mercers are correct in identifying the difficulties that the "Default Option" and the Age Based "Lifecycle Option" have in addressing the balance between volatility, inflation and longevity risk.

A growing chorus recognise that the industry can and should do better than placing two MySuper members, one aged 18 who is likely to retire with a $1M and one age 65 years retiring on the Age Pension in the same asset allocation. Funds that have moved to Lifecycle or Target Date funds have been fighting with one hand tied because they simply reduce risk and return using one factor - Age. This results in both lower volatility as retirement approaches but at the high cost of lower retirement balances on average.

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 18 year olds, one expected to retire on a million and the other on the pension to be invested in different asset allocations and two 65 year olds to also be invested appropriately. 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. Rice Warner should be widely congratulated on displaying this effect in the articles graph.

The 'simplest' approach mentioned in the article - using two portfolio's (cash and growth) is however unnecessary as a funds existing (choice) investment options (i.e. cash, conservative, aggressive, equities) are already in place. Trustee Tailored Super (www.trusteetailored.com) is an automated patented method for achieving this improved risk return outcome - not a Default Option not a Age Base Lifecycle Option but a new approach that uses the information already held by trustees in their own member databases.