The debate on how asset classes are categorised as growth and defensive has arisen again. I can recall debating this many times since superannuation performance surveys began to achieve prominence. The matter is deemed important because it enables super funds to categorise their default option into the central balanced (61 – 80) category and thereby compete in the annual arms race for the best return. I suspect the debate will be thorough and in the end inconclusive as it always has been.

I am not seeking to contribute again by digging out the old arguments.

Instead let me offer a new way. Perhaps the debate about how to categorise growth and defensive assets is not actually that important. The FSI, ASFA’s White Paper and others have called on the industry to refocus on what the real objective of our default funds is. That is, ensuring members achieve a balance that can support a sustainable retirement income. This objective is not dependent at all on categorisations of growth and defensive assets. This debate is only important if the aim is to compare funds’ returns over the last year. It is notable it usually rears up after June 30 each year.

The most important characteristic of a default fund is the overall risk level that the trustee selects for its members. Some trustees select the same risk level for all members. Some, and I acknowledge QSuper is in this camp, have moved on and are selecting different risk levels for different members. This decision will weigh far more on the ultimate outcome members experience than whether or not any particular fund did comparatively well around seeking a common risk level. To professionals this is a debate about absolute versus relative returns.

Members will have a far greater probability of achieving a sustainable retirement income through their fund if the trustees get decisions about absolute risk correct. Relative returns mean far less to members.

So rather than “modernise” the debate I say abandon it. Let’s start reporting returns of default funds and contemplating them in an absolute sense.

To show how interesting that debate could become QSuper’s default members for 2015 received returns ranging from 14 per cent to 6 per cent. The difference in return outcomes lay in which investment strategy the QSuper trustee selected on these members’ behalf. This decision is based on members’ ‘funded status’ (or how adequately funded they already are relative to their retirement income objective) and how long their investment horizon is (implying obviously different risk tolerances). The average balanced (default) fund earned 9.5 per cent over the 2014/2015 year. Six of QSuper’s eight default investment option cohorts got returns above 9.5 per cent. That is every member younger than 58, which for our fund is within four years of the expected point of retirement for an average QSuper member. I would be very happy to participate in a debate about which fund has moved which default members closer to retirement adequacy and what risk did they take (in terms of that retirement income) to get there.

The QSuper Balanced Option (now a choice product) returned 12.5 per cent by comparison.


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