QSuper has begun segmenting member investments according to age and account balances, in what it is heralding as the end of an era of one-size-fits-all default funds.
Rosemary Vilgan, chief executive of QSuper, believes this approach matches best practice globally, meets new higher duty of care standards for MySuper and is being closely looked at by other Australian superannuation funds.
The fund’s first step has seen it write to members in the first cohort, those who are over the age of 58, invested in the default investment option, and with more than $300,000 in their account. These members were informed that the investment strategy was changing and that they had the option to opt-out. So far only about 20 per cent have chosen to opt-out.
The fund plans further segmentation, seeking to apply more aggressive strategies for younger members and to find appropriate strategies for those with lower contribution rates and for women with disrupted work patterns.
Vilgan said: “I believe this is something that every fund should do. What we are doing may seem a bit brave, but it will be brave in the future to say everyone gets the same strategy. We believe this is where every fund will be in a decade’s time, perhaps earlier.”
QSuper’s thinking is based on differentiating between the average rate of return for a default fund and members’ own internal rate of return (IRR). The IRR takes into account a member’s unique start and end dates for investment and how this and their overall account balance can produce markedly different outcomes.
This means that a default fund with an average rate of return of 9.7 per cent over a 10-year period could disguise that some members with an IRR as low as 4.5 per cent or as high as 16.5 per cent.
Vilgan says a liability-matching approach rather than a wealth accumulation mindset is needed.
“If equity markets are fairly valued or over-valued at the moment, what should you be doing? The answer is probably something different for the different members in your fund. If there is a big equity drop, then the members near retirement will be quite worried. What if it goes down 15 per cent for those at age 60?
“We have looked around the world and it is considered indefensible that you would treat a 30-year old and a 60-year old the same, no matter what the economic circumstances, no matter what their account balance.”
Part of Vilgan’s thinking is based on behavioural finance, which she believes is encouraging members to herd around what their peers are doing.
“We are not rational beings, we are human beings. Losses are feared incredibly more than gains are desired. The default [response] might be ‘Gee! This is scary. I don’t know enough I am going to leave this up to the experts’.”