Superannuation funds have been overly focused on measuring investment performance and should spend more time ensuring they are meeting their members’ retirement savings goals, Russell Investment’s global head of consulting Don Ezra says.
Ezra, a 35-year veteran of the consulting industry, says superannuation funds should aim to provide for the “life outcomes” of its members.
This focus on life outcomes entails a discussion around not only what is a necessary lump sum at the end of an accumulation phase but also a continuing investment strategy into retirement that ensures members’ desired lifestyles can be funded.
Saying the job is only half done by the time a member retires, Ezra points to research that shows that up to 60 per cent of retirement income is generated from investments made after an individual retires.
This demands a much greater focus on managing risk exposure as a member ages, as well as funds better understanding the needs of its members. Ezra is an advocate of glide-path investment strategies, in which investment risk is gradually decreased up to and beyond retirement.
“We have all focused too much on the investment aspect and not enough on the life-outcome aspect,” Ezra says.
“As investment geeks we have been reporting on the investment aspect and we don’t report on the life-outcome aspect, and that gives a more calming long-term perspective and actually, I suspect, makes the system look better.”
Re-frame results for outcomes
Borrowing from the idea of funded ratios in defined benefit, Ezra says that superannuation funds should be looking to communicate the funded status of their members’ desired life outcomes.
This funded status is crucial for a member being able to ascertain what investment risk they are prepared to accept, as well as how much they may need to contribute to achieve their goal.
He has written extensively about governance best practice in the defined contribution space and says that boards should be looking at how they can re-frame reporting to members to provide a better sense of how the fund is traveling towards achieving an individual member’s objectives.