Provided by Mercer: 21/4/10
Working Australians’ reliance on the current static default superannuation investment options is hampering their ability to confidently save for retirement.
In a session titled “Baby Boomers in Retirement”, Simon Eagleton, Head of Mercer’s Investment Consulting business for Asia Pacific, said that Australia has grossly over-simplified the pre- and post-retirement investment strategy problem.
“Difficulties in engaging and educating young members about superannuation investment, combined with inertia in member decision-making, have led to default investment options (such as so-called “balanced” or “growth” options) being overwhelmingly the most common strategy adopted. But as an industry, have we got this right? Is a static 70-75% growth-oriented investment strategy optimal for all members, at all ages?”, he said.
Mr Eagleton said it’s time to rethink the one-size-fits-all approach and replace it with a ‘whole of life’ strategy that changes with age.
“We need an investment strategy that’s able to exploit young members’ long term investment horizons, but recognises the reduced risk tolerance of members approaching the draw-down phase. Moreover, we need this to sit within the default structure, because reliance on education alone is insufficient to ensure super fund members adopt the most appropriate investment strategy,” he said. ‘
Mercer argues that a preferable approach is based on a ‘glidepath’, where fund members start their accumulation with high exposure to growth assets, then gradually include more defensive assets in the years prior to and during retirement (see Graph 1 below).
Co-presenter Dr David Knox, Senior Partner in Mercer’s Retirement, Risk and Finance business, expanded on this theme of retiree income needs.
“The tsunami of retiring baby boomers is only just beginning, and while their wealth is greater than any previously retired generation, they’re also increasingly aware of the risks they face in an uncertain world. Such risks include market volatility (as seen in the GFC) and longevity risk – the prospect of living longer than expected. It’s no wonder baby boomers want more security both now and in the future,” Dr Knox said.
With the majority of Australians in a defined contribution super fund, Dr Knox points out that these individuals currently bear all the risks of retirement.
“Within the Australian market, there is a growing range of possible products and approaches for converting the lump sum accumulation into an income in retirement. These transfer market risk and longevity risk to varying degrees, but there’s still room to develop a solution that delivers both individual control, and protection from risk, for today’s baby boomers,” he said.
Both Dr Knox and Mr Eagleton agree that more innovation is needed for post-retirement product design. Indeed the development of some default retirement income products, in line with some of the thinking from the Cooper Review, would represent a positive step forward.
“As the generation that brought forth the Beatles, baby boomers have often seen themselves as children of the revolution. Now it’s time for them to see a retirement savings product revolution,” Mr Eagleton said.
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
