There has been an international response to The Members’ Default Utility Function (MDUF), with groups from the Netherlands and South Africa approaching the team that has been developing this new approach to retirement planning.
“Pension industry consultants have been knocking on our door to swap notes,” project leader David Bell tells Investment Magazine. “Everyone has a pension system and they’re all facing the same challenges. A quantifiable retirement outcome objective is important around the world.”
MDUF v1 is a formula that accounts for the range of retirement outcomes default members could experience. Bell, the chief investment officer of industry fund Mine Wealth + Wellbeing, led the group of 15 industry experts and academics that developed the formula, with the Australian Institute of Superannuation Trustees and the Association of Superannuation Funds of Australia as custodians of the project.
The model develops a set of financial preferences for trustees to assume on behalf of a default fund member, avoiding behavioural biases and instead focusing on sustainable retirement outcomes.
Right now, the MDUF team is educating the market about the formula and has presented its work at many industry conferences, where it has been well received.
Bell said Mine Wealth + Wellbeing is starting to use the formula internally. The fund, formerly known as Auscoal, is a test case for the algorithm, and work has gone into educating the board and executives about the power of the instrument.
The team has also prepared submissions for Treasury’s inquiry into the potential for a comprehensive income product for retirement (CIPR) and for the Productivity Commission’s review of the competitiveness and efficiency of the superannuation system.
Bell predicts it will take time to achieve widespread industry adoption of MDUF, given entrenched current approaches to retirement planning.
MDUF’s first iteration is just the initial step in an ongoing program of activities. Financial products and retirement solutions will be developed based on the framework.
“We are working hard on products,” Bell says. “I can’t say at the moment what they are, but it is all very exciting. We’ll be implementing some great retirement solutions for our members in the future.”
He says that, over time, most super funds will create a financial modelling unit or work with consultants more closely to develop retirement outcome solutions for their members.
“Funds need a function that can undertake complex modelling and convert it in a way that can be communicated to members,” he added.
MDUF v1 is open source and points of debate that occurred during its development were documented; for example, there was substantial conjecture about whether super fund members would value a residual benefit.
A residual benefit is a lump sum that represents the remaining money in a member’s fund on their death.
“We spent months debating it,” Bell said. “But if two solutions gave you an identical retirement income stream, but one had a residual benefit and one didn’t, we believe people would put some value on the residual benefit and that option should be preferred.”
Consumers also need to understand the variability in their retirement outcomes. Bell expects member communication to be the main challenge, given the complexity involved in developing retirement solutions.
“The next stage of the process is working out how to communicate in a simple way,” he says.
Bell launched MDUF v1 at the Investment Magazine Post Retirement Conference in March 2017.