Lifecycle investment strategies problematic
Superannuation consultancy Watson Wyatt has warned that so-called “lifecycle” investment strategies aimed at protecting super fund members through volatile times can be destructive if not implemented properly.
The head of investment strategy at Watson Wyatt, Tim Unger, said while the lifecycle approach continued to be a robust answer in dealing with market turbulence, members could be let down if it was badly-implemented through an overly simplistic investment design, poor switching mechanisms or excessive cost.
Watson Wyatt’s principal consulting actuary, Nick Callil, said better member profiling and greater engagement with members were the key to improving the implementation of the investment proposition.
“What lifecycle investing needs is a flexible framework within which members can follow a more personalised strategy rather than a simple one-size-fits-all solution,” he said.
“While the principle of a lifecycle approach can be a sensible way to control risk in a member’s portfolio, its delivery has not evolved sufficiently in the past 20 years to be effective today, and there has also not been sufficient attention paid to how the Australian superannuation environment differs from overseas pension markets,” Callil said.
He said in the UK, for example, members were required to purchase an annuity on or soon after retirement, in which case significant de-risking prior to retirement made sense, while in Australia most retirees used account-based pensions and could also rely, to some extent, on the age pension.
Callil said this meant there was less of a need to significantly de-risk the investment portfolio before retirement.
AUTHOR
Mike Taylor
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