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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.

Sunsuper has added the overlay even though it recently cut
the administration fees on its pension products to 0.25 per cent for the first
$300,000, 0.15 per cent for the next $400,000 and to zero for accounts
exceeding $700,000. Members who choose the Today and Tomorrow pension
automatically have an amount of cash, equal to twice the annual pension payment
they’ve selected, set into their account. This buffer was viewed as suitable by
the fund and its internal financial planning unit, the member advice centre, because
it would prevent members from drawing on growth capital during the rough
periods of a bear market.

 

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