Ross Jones, deputy chairman of Australian Prudential Regulation Authority, has an unswerving belief in the good that MySuper is bringing. Finding others who agree with him is hard. Leading industry figures spoken to for this article take a more jaundiced view. They say, if anything, compliance has held up funds’ plans to innovate and bring more appropriate member outcomes. Though, having seen all the applications for MySuper that have landed on his desk, Jones is best placed to know what the world will look like on July 1.
“I don’t think it has any effect in terms of decreasing innovation, because what we’re seeing in fact is substantial innovation,” he says. “There’s a lot of change. A number of the funds have come in with lifecycling for their MySuper product.”
The positive picture Jones paints might clash with those in the industry who do not see lifecycle as driving better outcomes, it may also be a matter of what your definition of innovation is, or what counts for ‘a lot’.
Before one debates these issues, it is worth pointing out the consensus on what innovation does look like. QSuper has caused a stir with its decision to separate members into cohorts through a process of negative consent. Those over the age of 58 with large account balances were moved to a lower risk option in February (only 20 per cent opted out) and the fund will offer a tailored solution for those over the age of 58 with lower balances at the end of this year. In 2014 it then plans to move through the entire default membership, putting each member into the relevant cohort with specific investment strategies. It is not a policy that is widely being followed, but Rosemary Vilgan, chief executive of QSuper told delegates of the CMSF in March that it might look brave now, but that in 10 years’ time it will look brave if funds do not take this approach.
Another surprise is ING’s no-fee product for its bank customers, that has 50 per cent of assets in cash and 50 per cent in passive equities. The product is not approved for MySuper, but is riding the same wave of interest in what a default should offer. It has so far gained 10,000 members, 60 per cent from existing personal banking customers and 40 per cent from outside.
A pause in innovation
However, beyond these examples senior investment consultants are generally a lot less excited than Jones at the overall level of innovation they are seeing in MySuper.
Nick Callil, head of post-retirement solutions at Towers Watson (pictured right), talks of funds too “swamped” with the requirements of MySuper and StrongerSuper to change a one-size-fits-all approach.
“Innovation was coming anyway,” he says. “An unfortunate effect is that [legislation] has caused a pause in that because of the resources required to get over the other aspects of it. I know a number of funds that are interested in lifecycle, but their attitude is we need to get past July 1 and then we will have some more resources to get past that. I do not think what funds have at July 1 is frozen for all time.”
Ian Patrick, chief executive officer at JANA Investment Advisers, is also underwhelmed at the amount of ‘innovation’, but he agrees that change is on the way, even if it does not happen on July 1.
“There is a significant amount of thinking and activity around the nature of defaults at this point in time. QSuper would argue it is part of their general evolution, but there is enough focused debate to indicate MySuper played some sort of role.”
While there may not be revolutionary change at funds that have authorised MySuper products, most are bringing in some sort of change around the edges. Interest in the area of smart beta is being sparked by its apparent promise of superior returns at prices not dissimilar to passive equities, reports AXA Investment Managers. However, the common approach is a one-size fits-all fund backed up by higher levels of engagement to determine whether members are comfortable with the level of risk in this default.
This is borne out by Equipsuper, whose chief executive officer Danielle Press (pictured right) follows a “do no harm” interpretation of MySuper. Her fund is offering a dynamically managed investment strategy that limits the downside and volatility for members. On top, it will increase the amount of engagement with members to ensure this default is always the right choice. Press says: “We need to be engaging with members on their journey to retirement and we need to talk to them about what adequacy actually means. Because what is adequate for me is quite different to what is adequate for you or anyone else.”
Similarly, Commonwealth Bank Group Super is using its 70 per cent equity fund for MySuper and expanding its advice for members, from an active engagement approach for those approaching retirement to younger members.
For some the one-size-fits-all fund with active engagement is a rejection of lifecyling. So if, as Jones says, there are a number of funds choosing this route for MySuper, then the industry is heading for a split in ideologies.
Opponents of lifecycle
“Trying to capture people’s risk return profiles in a simple formula is fraught with danger. It potentially sets up a whole bunch of apathy. I would prefer if there was better engagement. Before the GFC, why on earth would someone who was about to retire in a year’s time have 70 per cent in equities? That person should have been given a call from the fund.”
Indeed, there is no shortage of people who can argue convincingly against lifecycle. Mark Blair, principal head of superannuation at Rice Warner, describes it as a “solution for the average member of a fund that does not exist”. He proposes segmenting members, talking to them to find out what they need – an approach that costs money he acknowledges.
Another argument against lifecycling, with its gradual reduction in investment risk, is that someone with a balance of $200,000 at retirement is best left with a high equity allocation rather than a reduced-risk portfolio.
Towers Watson’s Callil says: “Someone with an account balance of $200,000 will virtually always get the full age pension, which for a single person might be worth $400,000 to $500,000, so in effect they have the bulk of their money in bonds. If you suffer a loss on the invested part, the value of the pension side actually goes up, so it is negatively correlated with your investment because of means testing in that taper zone. So it encourages you to take more risk with your invested portion.”
Another argument against lifecycling is the markedly different outcomes that can occur depending on the dates when a member starts and ends their contributions.
Patrick of JANA Investment Advisers says: “People have thought a lot about how the pattern of investment returns will impact two very similar members, just depending on whether they started a year apart and how quickly they built assets through voluntary contributions. Alternatively some have decided that a disengaged member needs some other solution, a dynamically managed approach to reducing equity risk throughout their lifetime. The common thread is they are turning to the member outcome and the member experience and re-examing their investment strategy from that point of view.”
Given the nature of individual advice and the issues around the time at which a member starts investing, the MySuper proposal for a product dashboard where members can easily compare the performance of their fund against others, is arguably missing the point.
In particular, one of the pieces of research being carried out by actuaries could push the funds of members in retirement towards more volatile strategies that might not perform well in league tables, but which meet income needs.
Paul Sweeting, an actuary and strategist at JP Morgan Asset Management, says this is being driven by the growth in significant numbers of members who are approaching retirement with sizeable savings.
“A relatively stable level of income can be obtained from a fund whose asset value might be quite volatile,” he says. “This means thinking about risk and reward in a different way. In particular, shifting the focus onto metrics that relate to income. In this context, it’s not a discussion about how much risk is being taken but about how risk is measured and what is meant by risk.”