• How extensive should the investment choice be?

• How should the default fund’s investment strategy be set?

• Are the investment options managed actively or passively and how much should be managed in-house or outsourced to fund managers?

• How should the fund communicate with members on investment issues and how can members be best engaged regarding the choices they have made?

It is not just about investment performance that funds need to exercise effective risk controls it is very much the investment processes, both at the strategic and tactical levels. A clear investment strategy needs to be developed and documented. Funds must set criteria for measuring acceptable investment parameters for the investment strategy of each investment option. Compliance and operational systems should be in place to ensure that compliance with all guidelines can be regularly monitored.

The experience in the Australian market is overwhelmingly that members select the default option irrespective of the level of choice available. This default option is developed by the superannuation fund to achieve a set of risk/return characteristics and broad asset class diversification. Given this scenario it could be said that the superannuation fund has taken on the role of fund manager for the default fund. This imposes on it a different burden of responsibility than is the case as a provider of retirement savings options.

Around the default option are a range of investment options that are presented in the PDS with set risk/return characteristics. However, it is unclear whether the actual ex-post risk profile is actively managed to this objective or how the risk/return profile has been set. Is it based on historic asset class and/or manager risk/return outcomes or is it based on forecasts of investment market returns?

The presentation of risk as ‘low’, ‘medium’ or ’high’ raises the issue of what those risk labels signify, as it is not a quantifiable analysis of the actual risk borne by the member. Is it consistent across the industry or based on how the individual fund seeks to position its range of investment options across the risk spectrum? Is this a case for the industry to set guidelines as to how this information is presented to members?

The recent investment market volatility has highlighted this issue. For example, losses have been incurred in many sub-sectors of the bond asset class, which is generally regarded as ‘low risk’. To understand and accurately assess the risk profile of the underlying investments in an investment option may require a significant commitment to the monitoring and management of such risk. From a holistic perspective, superannuation funds’ overall exposure is directly related to the combined exposure of all the investment options.

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