By then it can be too late. Funds should safeguard members’ assets 15 years before they retire and gradually convert these pools of savings into income, Drew says. This “retirement risk zone” extends until members are 10 years into retirement.

“We seem to be creating solutions that are single-date dependent, when this is really a 20-to-25 year conversion phase from retirement savings into retirement income.”

Funds should adapt to financial market conditions in this period. But current products set retirees on a “deterministic path,” Drew says. “You tell people what their asset allocation will be in 30 years, regardless of what market conditions are.”

Funds would need to blend long-, medium- and short-term investment strategies as they convert savings into retirement income, he says.

Only those members entering retirement should pay for additional investment services, such as strategies that use options to keep capital safe in down markets, he says.


“Dangerous” options


In declining markets, age-based defaults can make paper investment losses real and are potentially “dangerous,” says Kim Bowater, head of investment research at Frontier.

She says funds should gradually shift members’ savings into more conservative investment strategies to reduce the risk of crystallising large losses. This would also give funds time to talk to members about their desired level of income in retirement.

“If you phase it in, it’s better from a valuation perspective and you get to educate the member and tailor the outcome for them.”

Most retirees invest conservatively. However, despite the 0.2 per cent return of the median growth super fund in the 14 years to December 2011, Frontier believes that retirees should invest some of their savings in equities to beat inflation. Unlisted assets, such as infrastructure and direct property, can provide stable returns that offset the volatility of equities.

Most industry super funds do not offer capital guaranteed investment products. AXA Australia manages a product called North that guarantees a predetermined level of income. Challenger Financial Services has marketed annuities heavily in the past two years to financial planners. However Bowater says there is room for an “institutionally priced” capital guaranteed product in Australia.

Beating the rate of inflation in volatile markets over long time periods is not an easy task, says Marc Lieberman, CEO of MetLife Australia. It is possible for super funds to provide capital-guaranteed investment products if they enter long-term contracts with suitable insurers, he says.

Such insurers have “proven global experience in the management of capital and longevity guarantees, supported by a strong balance sheet,” Lieberman says.

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