The financial crisis exposed a major flaw in superannuation: the inability of accumulation-focused funds to protect members on the cusp of retirement or in the early decumulation phase – when large investment losses can be catastrophic. But lifecycle investment strategies are evolving that provide funds with the tools to meet the needs of this burgeoning member segment, as discussed in a recent roundtable convened by Investment Magazine and Milliman.

In the main, traditional strategic asset allocation strategies have been too “static” and focused on a one-size-fits-all approach, according to Wade Matterson, practice leader – financial risk management at actuarial firm Milliman.

The default options run by super funds – which cater for the majority of members who are, invariably, in different stages of saving and have differently sized account balances – generally do not have the flexibility or “tool-kits” to protect members in this late-accumulation, early decumulation danger zone, he said.

“We’ve got more people approaching this stage, when assets are maximised,” Matterson said, adding that funds should be providing members with investment strategies and options to enable them to access a secure balance in retirement, while also maintaining exposure to growth assets. “Retirement is a long time, and you need exposure to growth assets,” he said.

Super funds a number have options available. They can choose among the approaches increasingly offered by funds managers, or partner with an insurer or investment bank whose balance sheet muscles enabled them to provide capital-guaranteed products. But there is a wide middle ground between these offerings, Matterson said, including internally run solutions that can draw on the input of implemented consultants or specialist providers.

First and foremost, funds should view these startegies as an asset allocation solution designed to mitigate risk on a “best-efforts” rather than guaranteed basis, he said. Before seeking external expertise, they should learn how they can adjust their asset allocation strategies to better protect members. Then, if necessary, appoint an third party to cater for members who demand a capital or income guarantee.

But since guarantees involve significant counterparty risk and are often perceived to be expensive, funds should consider how these offerings are structured, delivered and communicated since, in time, they could feasibly run these products themselves, Matterson said.

It was important for funds to canvass the array of protection methods available, how they can be implemented and the ways in which members’ needs could evolve in time, he said.

These ideas were discussed by super fund and wealth management CIOs in an exclusive roundtable convened by Investment Magazine and Milliman.

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