Health Super, with its asset consultant Watson Wyatt, has come up with a solution called a “Life Cycle Default Strategy”, using its existing framework. Like most funds, it has a long-term growth option (90/10), a medium-term growth option (70/30) and a balanced option (60/40). But since 2003 at Health Super, anyone under the age of 50 who doesn’t make an active member choice will enter the long-term growth fund as their default option. After members turn 50 they are contacted and switched to the medium-term growth, and then at 60 they will be put into the balanced option. This moving about may incur some additional administration fees, but according to chief executive Chris Clausen, these are negligible. “We have a whole spectrum of members, many are busy in the health industry and don’t look after their financial affairs,” he says. “We believe over the long-term that they can handle a substantial amount of the volatility that comes with a growth oriented strategy, which should give them better returns.”
Before age-based/target-date/lifestage/lifecycle funds can become the ubiquitous default, there are several factors struggling for industry consensus. Aside from what to call them, there is also little agreement on how to determine the best “glidepath” – by how much the asset allocation should shift and at what age. Most of us have a fair idea of when we would like to retire, but no idea when we will actually die. Terry McCredden, chief executive officer at Telstra Super, points out that many people who retire at 65 will go on to live for another 30 years. Arguably that is enough time to handle any volatility a growth portfolio may bring. “Maybe target-date funds should aim at 80 as the age to begin becoming conservative,” he says.
BT’s Evans explains it in terms of behavioural finance. “At 65 ideally there would be more growth, but at that age people tend to monitor their super and worry more about the downside,” she says. Matt Smith, managing director of retirement services at Russell in the US says that the downside really does affect someone more at 65, even with 30 years of life expectancy. “There’s a big difference between a 25 year-old losing 6 per cent of a few thousand dollars and a 65 year-old losing 6 per cent of several hundred thousand dollars.”
Michael Blayney, investment consultant with Watson Wyatt, argues that age is not enough to determine the best glidepath. He recommends each industry fund set its own parameters tailored to its demographic. Then there is the benchmark problem. Comparing funds whose asset allocations change at different rates, over different periods of time, with a 40-year horizon, presents a whole other set of challenges.