An individual who is on target in accumulating their retirement nest egg (say, eight times final salary as a balance, the ASFA comfortable retirement income standard) would be “heroic indeed” to have high exposure to growth assets in the years preceding retirement. Individuals who have the good fortune to experiencea bull market in stocks during their accumulation phase may achieve a super-account balance that is higher than their retirement target and are advised to de-risk their asset allocation as they are on target in achieving their retirement objectives. As a consequence of meeting their retirement target, the individual would shift their asset allocation away from stocks and increase their portfolio exposure to bonds.
Conversely, individuals who have not experienced the wealth effects of the equity-risk premium need to remain allocated to equities in order to increase the probability of growth in their super account in order to achieve their retirement objectives. Without exposure to the equity-risk premium, these super members will experience many years of frugal retirement dominated by funding from the federal government pension. (Basu, Bryne and Drew, Journal of Portfolio Management).
Broaden input criteria Under this framework, regardless of age or risk profile, the asset-allocation decision will differ depending on whether or not their super account has achieved their retirement outcomes. Real-life examples of individuals who require higher exposure to equities include those who are intermittently unemployed at various periods in their working lives, those who leave the work force to study and thereby reduce their super-fund contributions, those who may be in part-time work or take a leave of absence to commence a family.
The current design of the national superannuation system cannot efficiently manage individual super accounts based on differing ages alone; work profiles, contribution rates, as well as investment returns are all key inputs to achieving retirement objectives.
The question posed in the title of the ASFA event is important, as it can never be answered with a simple yes or no. Allocating more or less super to bonds is a function of the outcomes trying to be achieved. There are plenty of 60-year olds who were on target for a comfortable retirement until the GFC came along and vaporised their retirement outcomes. There are multitudes of super members with measly superannuation account balances and are not meeting their retirement objectives, and yet, the current superannuation system has few cogent solutions to their plight.
We need new framing to address the future challenges in the Australian super system and the desired outcome may be the place to start.