Post-retirement represents the biggest challenge to Australia’s superannuation industry and yet the sector was failing to address the growing issues either through advice or through product design.

These are the views of the author of a white paper, entitled Boomer, Herding, Denial and Zeitgeist, published last week by research house Lonsec and actuaries Milliman.

The report claims that the current advice model for retirees is “sub-optimal,” that the suite of products is “too limited” and that while the industry is doing a lot of talking, “solutions and responses have been thin on the ground.”

Milliman’s Wade Matterson, one of the authors, says that with a growing number of baby boomers reaching retirement age, there were “mounting expectations of the performance of the advice process and the products they are invested in.”

His co-author, Lonsec’s head of investment consulting Lukasz de Pourbaix, said the industry’s current solutions were “anchored to approaches more relevant to accumulators” than retirees.

“While there is a growing number of retirement products on the market, there continues to be a lack of guidance around constructing portfolios to meet retiree objectives,” Pourbaix said.

Objective-free

The white paper looks at a number of common approaches to portfolio construction and assesses the outcomes in terms of meeting income objectives. Taking a lump sum of $400,000 for a retiree at the age of 65, the authors model several post-retirement approaches, such as 100-per-cent investment in equities, 100 per cent in cash and a 70/30 growth/income portfolio.

“The analysis demonstrates that conventional approaches to asset allocation, underpinned by mean-variance optimisation, are not necessarily aligned to retiree objectives,” the report says.

“Such approaches are not designed to target specific objectives, such as income replacement, and therefore minimises the possibility of achieving such objectives.

“The analysis also highlights that asset allocation alone, in most instances, may not be sufficient to meet the needs of retirees and that sound strategy will need to be supplemented with products designed to assist meeting retiree objectives. These products will be different than those currently used in the accumulation phase.”

 

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