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Portfolio insurance provides strong protection: Research

Australians need to consider more sustainable income flows as a future investment objective or risk not having adequate retirement savings, according to research from the Centre for Excellence in Population Ageing Research (CEPAR).

CEPAR senior research associate Mengyi Xu said recent market volatility has raised concerns about whether future retirees will have adequate income later in life.

"I understand this is a difficult decision for the government and individuals alike in balancing the short-term needs and long-term saving goals. But withdrawing superannuation balances while losing jobs could have severe consequences for retirement savings," Xu said.

Xu evaluated the performance of two major types of portfolio insurance strategies, option-based versus constant proportion, which are used on a defined contribution (DC) fund that targets a minimum level of inflation-protected annuity income at retirement.

The research said that accumulated savings in a DC fund at retirement should aim to finance a desired level of consumption during retirement.

In addition, it found that both portfolio insurance strategies provide strong protection against downside equity risk in financing a minimum level of retirement income.

"The target annuitisation fund offers a solution to connecting pre-retirement investment to post-retirement consumption," Xu said.

"Such connection helps to address the concern inherent in DC funds that members may not receive adequate and sustainable income from their retirement savings."

The portfolio insurance strategies aimed to address some deficiency in the current default superannuation fund options that most people invest in.

Xu said few could be immune to the market turmoil that occurred in February and March this year unless their wealth had no exposure to the equity market.

"There are two main types of default investment strategies in Australian superannuation funds. The first one invests in a diversified portfolio where the proportion of each asset remains fixed over time; the second one is usually referred to as a lifecycle or target-date fund in which the growth assets are gradually replaced by safe assets as one approaches retirement," Xu said.

However, Xu added that both strategies still fall short of providing an adequate retirement income and fail to link the pre-retirement accumulation and post-retirement income needs.

"The lifecycle fund provides some protection against equity market downturn closer to retirement, but targeting a minimum guarantee is not explicitly embedded," Xu said.

Read more: CEPARCentre for Excellence in Population Ageing ResearchMengyi XuCOVID-19
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