“The Actuaries Institute would like to see retiring Australians have increased choice in relation to the retirement income products they are offered and considers the removal of current impediments to product innovation as an essential element of such a review, as well as ensuring that appropriate safeguards are in place to protect consumers and safeguard the Federal budget.” The pre-budget submission of the Actuaries Institute, February 16.
Even without the legislation allowing for equal tax treatment for deferred annuities and other product innovation, the Australian retirement market is seeing much innovation in 2014. Most of this is around investment strategies and behavioural finance.
The following three new solutions are designed for the unengaged member, the engaged and informed member and the client with a financial adviser. The Mercer and State Street Global Advisor products will be discussed at the 6th annual Post Retirement Conference, March 4, at Doltone House, Sydney.
Smart Path – Mercer
A lifecycle fund designed for the disengaged investor, Smart Path automatically switches member asset allocation progressively from age 22 until the point of retirement and beyond.
The investment switches are determined by member’s date of birth, rather than their target date of retirement; Graeme Mather, head of investment consulting at Mercer, says this is done to take into account of the uncertain nature of so many people’s retirement dates.
The path of investing takes young members from a heavy equity and unlisted equity allocation to a highly diversified portfolio to avoid volatility just before retirement. Once in retirement, units of investment are switched to take full advantage of tax concessions.
Mather says of the approach: “We recognise the fact that not everyone will want to engage a planner, there are some people out there who will just want to stay in a fund and have it generate an income for them in retirement.”
Specialist absolute return funds – State Street
State Street has eschewed a target date fund approach to create three specialist funds that are designed to be offered by financial advisers to clients who are aged over 50. The fund first is designed for those who are over 50 and want to maximise returns prior to retirement, the second is designed for those who have just entered retirement and the third is for those in the latter part of retirement. Each has a dynamic asset allocation and an absolute return strategy designed to outperform more benchmark aware MySuper funds.
Mark Wills, head of asset allocation State Street Global Advisors, says that new FOFA legislation, which places a greater requirement on advisers to look at individuals entire financial affairs before recommending an investment, counts against the use of lifecycle funds that treat members the same according to their age.
He says: “If a person has $80,000 at age 50, for them to get a good outcome in retirement they need to get that money working really hard and they need to stay employed longer. The builder will work harder as it takes more risk.”
Target date funds – AMP
In this model, regular communication is used to generate a high degree of member engagement about their path to retirement. In particular, it informs about the de-risking process that takes place in the years closest to retirement.
The funds behind this approach are split into 10 year cohorts with a dynamic approach to asset allocation and risk.
Sean Henaghan, chief investment officer of the multi-asset group at AMP Capital, says the retirement portfolio is managed to gain growth but to dampen volatility in a way that will not cause members to take flight.
“The transition to retirement is critical,” he says. “That is when you have the most money, but if you have a big draw down then you cannot top it up. So we mitigate the chance of having a return worse than minus five. We will do portfolio testing and scenario analysis to make sure that does not happen.”
To register for the Post Retirement Conference in Sydney on Tuesday March 4, where Mark Wills and Graeme Mather will speak, visit www.postretirement.com.au
