Hindsight is a wonderful thing. This time last year when our sharemarket was nearing its global-crisis low, a small percentage of superannuation investors decided to switch to more conservative investment options. In the case of a friend of mine who celebrated his 50th birthday on February 26, his super fund effectively made the decision on his behalf. My friend belongs to a fund with an optional age-based ‘lifecycle’ strategy. The strategy gradually reduces member exposure to high-risk growth assets over a 10-year period – the trigger points being the member’s 50th and 60th birthdays. A few weeks ahead of his 50th birthday, my friend received an ‘opt-out’ letter from his fund explaining that his super would be switched to a mediumgrowth investment option.

At the time, my friend thought it a wise move. The mood across financial markets was decidedly pessimistic and his super, previously invested in the fund’s most aggressive growth option, had been hit hard. He was pleased that his fund was doing something. We now know, of course, that March 2009 was not the ideal time for super investors to switch away from equities and other “growth” assets. The majority of super investors who stayed put – either in their funds’ default (balanced) option or a more aggressive growth option – did well, clawing back a lot of the losses of 2008. As it turns out, being passive or disengaged about their super paid off for millions of Australians. But had the above scenario played out a few years earlier, those super investors seeking shelter in more conservative investments options would be the clear winners today. So what does this say about the appropriateness of so-called lifecycle or target-date funds in our compulsory superannuation system?

Already popular in places such as Britain and the US, could these strategies be the answer to providing super fund investors with more retirement income certainty? This question is certainly uppermost in the mind of Jeremy Cooper and the panel of experts who are mid-way through their far-reaching three-phase review into our super system. Cooper’s first report back to Government released last year outlines the case for a no-frills “universal” default fund and suggests that lifecycle strategies could play a role in such funds. It’s AIST’s view that it should be left up to individual funds to decide whether to offer lifecycle funds and that it would be inappropriate for the Government to mandate such strategies. We are acutely way that many super fund members could do with some more help when it comes to making investment decisions, but we believe that more research needs to be done on lifecycle strategies to explore whether they do indeed produce a superior retirement outcome. It’s possible that other strategies could be shown to be more effective.

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