Taking risks with retirement balances may be counterintuitive but would probably improve prosperity, says Lesley-Ann Morgan, UK-based global head of defined contribution at investment manager Schroders.
Morgan took her audience on a ‘whirlwind tour’ of Australia, the US, the UK, Hong Kong, and South Africa, to show how several foreign markets are working to improve prosperity beyond retirement, at the 2018 Investment Magazine Post Retirement Conference, held in Sydney on March 20.
In the US, Schroders found that young risk-takers reaped better outcomes at retirement. A 25-year-old graduate with US$1.5 million in future earnings potential was projected to fare better using a target-date fund than the average balanced fund, Morgan said.
“Quite a lot of target funds have a high allocation to growth funds from a young age,” she said.
The onus was on super funds in Australia to make a default superannuation investment product “work as hard as it possibly can”, because most Australians choose a default product and stay there.
In the UK, diversified growth funds, such as the one Schroders launched in 2006, are growing in popularity as active funds that aim to grow above inflation for people aged 55 and older.
Plans using multi-asset investments deal with capital risk so, “if you can find a skilled manager and invest in different market environments, they can deal with the risk themselves,” Morgan explained.
In Hong Kong, life expectancies are now the longest in the world, so those who receive their lump sum at retirement need to re-risk to provide for longevity.
“If you get the sequencing risk wrong in Hong Kong, it can be very painful when your life expectancy is so long,” Morgan explained.
A new Hong Kong Government-backed annuity allows citizens a safety net similar to Australia’s age pension, so re-risking at retirement, by putting 60 per cent of funds into equities and 40 per cent into bonds, would stretch funds further, up to the age of 98, if markets are favourable, Morgan said.
In Australia, the age pension means those with modest retirement balances should be “nudged” into taking more risk to stretch their dollars further, Morgan said.
“If they have a $585,000 balance and you put it all into equities and shoot for the moon, if they’re lucky, they will live above the [Association of Superannuation Funds of Australia retirement standard’s] modest level,” Morgan said. “If they’re unlucky…the age pension will kick in…You might say that someone should take the risk.”
While South Africa has eclipsed Australia in one respect – it has already introduced its default post-retirement product – the nation has faced some challenges with underfunding. Because it provides no unemployment benefit, South Africans are allowed to draw on their superannuation accounts if they lose their job, Morgan said.
This leaves many people underfunded at retirement and puts those who live a long life “in a very bad place”, she explained.
Despite wide variances in life expectancy, there is scope for South African fund providers to put together a diversified investment portfolio with longevity protection, such as a deferred annuity offering, Morgan argued.
Lessons from these five countries show that default products need to work as hard as possible for people until they reach 55. At retirement, and just beforehand, people need to invest dynamically to increase their balances.
Morgan recommended that unadvised members on default funds be given a common framework at retirement, with a slide bar on annuity, and then draw down to suit their circumstances.