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The $12 billion Sunsuper has appointed Queensland Investment Corporation (QIC) to provide capital protection for one of its investment options, called Retirement, as part of the ‘Today and Tomorrow’ pension strategy, which provides an up-front two year supply of cash while investing the remaining balance mostly in high income-yielding shares. The capital markets team at QIC, led by Troy Rieck, will use a range of options strategies to provide some protection against poor performance by Australian and US shares, the dominant growth assets in the Retirement product.

The overlay will not aim to consistently provide full protection as it is subject to a fixed budget, David Hartley, chief investment officer at Sunsuper, said. “We’ve given QIC a budget on how much they can spend on protection for us. It is the amount of money that we’re prepared to spend on option premiums,” Hartley said. “We have a budget on what we can spend, and the more expensive it becomes the less protection we get.” The Retirement product is among a new suite of “purpose-driven” investment options that Sunsuper will roll out in new product disclosure statements, Hartley said.

Rather than managing to the risk tolerances of members, the products aim to meet their defined investment needs – for example, saving a fixed amount to pay off a mortgage or take a holiday, accruing wealth to provide income in retirement, or turning accumulated wealth into sustainable retirement income. “People in retirement want to get a lot of income and some capital protection. There’s a need that defines the purpose of the option.”

Using risk profiling to set investment options often misled members about the nature of risk, Hartley said, as it assumed that options perfectly captured a direct causal relationship between a risk profile and an investment outcome. For example, some investors in growth options become dismayed when bear markets deplete their balances, since they do not fully appreciate how lots of risk can lead to big losses as well as returns. Also, investors’ attitudes to risk can change over time, and they might bail out of long-term strategies laden with risk at the wrong time.

The purpose-driven options have been built so that investors can change between them over time, or allocate to different options as they attempt to meet a variety of needs. Members that make no decisions are put into a balanced option. Hartley said the expected return from the Retirement option is the same as that of the existing Balanced option. However the new product is not taxed, which helps to cover the cost of the capital protection overlay.

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