This departed from the traditional target-date approach to lifecycle investing, in which portfolios gradually shed risk as members approached retirement, and helped combat longevity risk by maintaining exposure to growth assets after members retire, Drew said. He and Reedman would work with funds’ asset consultants and investment managers to apply an options strategy to protect portfolios. “During the global financial crisis some members in balanced funds underwent a 25 per cent downturn in their last five years of working. If you’re in that age 55 to 60 cohort and you wear a GFC in the neck, it’s going to hurt.”
The strategy would focus on default funds because most members – between 80–90 per cent – were invested in them, he said. And since most were not keenly aware of their super and were not astute investors, which sometimes led to “ill-informed switching” during market troughs, the long-maligned problem of member disengagement could be capitalised on. “The big game is default design. We can’t hope or trust that members will switch at the optimal time in the investment cycle. “Ill-informed switching is a massive challenge. We’re suggesting why don’t we use that inertia for good?” Drew said the strategy was “into week 10” of its development, and while discussions had been undertaken with funds, “there is no pitch book yet”.
But Reedman said the strategy would not seek to change funds’ existing asset allocation strategies, and he and Drew would be comfortable working with funds’ current consultants and investment managers to implement the strategy. “We’re not doing the work that consultants do; we’re not picking managers for the glide path, and these aren’t dynamic asset allocation decisions.” He said the costs of the strategy would be “fairly minimal,” resembling those charged by an active currency overlay manager, and that only those members receiving the options overlay would pay for the service, ensuring that younger members would not crosssubsidise the program. The approach also involves refining the value proposition of super to members in the conversion phase, Drew said, so that return goals are explained as multiple of final salaries, or the ‘comfortable lifestyle’ amounts defined by the Westpac ASFA Retirement Standard, putting a dollar value on investment returns and illustrating how the strategy can play a role in achieving them.