“Engagement is only useful if it helps you get to the goal; we’re not in the entertainment business,” he says. “There is a tendency to clutter in the industry.”

Innovate to be individual

Merton, who among other things was a co-founder of Long Term Capital Management, says these solutions have to be customised for every individual – to be individually managed accounts.

By way of example, he says if person one has 90 per cent of their retirement income in future contributions, and person two has 90 per cent in super and 10 per cent in the contributions of the future, the effect of a downturn will be dramatically different in terms of their overall retirement income.

“If, for example, both of them had 100 per cent of their pension assets in equities, in August 2008 equities were 40 per cent down, person one would only have a 4-per-cent loss on their total retirement assets, but for person two, it would be a 36-per-cent loss,” he says. “You must know the individual information. It’s an important innovation to be individual and not to pool.”

He demonstrates the difference between a managed DC plan and a typical fund allocation of 70 per cent growth and 30 per cent defensive.

The first point is that the managed DC plan allows for an individual’s particular circumstances and the range of fixed-income allocation over time will depend on those circumstances.

Taking one person who is 25 years old and doing Monte Carlo simulations against market conditions throughout a lifecycle produces a range of allocations.

“At, say, age 37 the optimal allocation can range from under 18 per cent to nearly 100 per cent in fixed income, depending on what happens to them and where they are on reaching their goal,” he says.

According to Merton, a “glide path” based on the average of those ranges could be very far from what’s best for the individual depending on what happened to them or is right for their circumstances.

http://www.nobelprize.org/nobel_prizes/economics/laureates/1997/merton-autobio.html/