Mercer has criticised the current default superannuation products on offer to Australians and has urged trustees to take a 'lifecycle' approach to default investment strategies.
David Anderson, Mercer managing director and market leader for the Pacific, said current default products expose members to the possibility of a dramatic drop in accumulated savings leading up to retirement.
"There have been two dramatic market events just in the last decade which have reduced average 70/30 default fund member balances by 27 per cent and 44 per cent respectively," Anderson said.
"Both had a material negative impact on members close to retirement. [Because they were] unnecessarily exposed to market sequencing risk, it limited their ability to plan for, and fund, an adequate income for retirement."
According to Anderson, a lifecycle approach changes over the course of an individual's life and can better protect against the risk of a decrease in their account balance as retirement approaches. The first step for building a lifecycle approach into default products is an age-based fund.
"Using this approach, members start with a high growth strategy and a heavy equities focus and then reduce their exposure to risk over time. By the age of retirement, the investment has relatively low volatility," he said.
However, Mercer stated that this type of product could be complex, as products must be tailored to the needs of each super fund and its membership from a legal and administrative perspective.
The Government's MySuper policy has allowed differential age-based investment fees, removing a significant impediment to adopting this approach – it's now up to super funds to the take the opportunity, Anderson added.
Speaking at the Association of Superannuation Funds of Australia (ASFA) National Conference, Mercer global chief investment officer Andrew Kirton said age-based investing had already been adopted in other markets around the world including the US, where 50 per cent of new money in defined contribution plans is invested in lifecycle funds.
