REI Super will use a new age-based strategy for pension members that splits their accounts across the fund’s balanced and cash options in line with their age.
Members under 65, for example, will be invested 8 per cent in cash and 92 per cent in balanced, while those in the 65-74 bracket will have 10 per cent in cash and 90 per cent in balanced. In this way, REI can gradually increase members’ exposure to cash and reduce their exposure to growth-style assets as they get older and their investment timeframe shortens.
This type of product has been more common in the accumulation phase of super; however, REI wants to ensure its pension phase members are sufficiently protected against inflation as they begin to draw down on their funds.
REI Super’s chief executive, Mal Smith, says the aim is to help less-engaged members feel more confident about the value of their pension when markets fall.
“We know that in retirement someone who’s 65 has 20 or 25 years of drawing down their pension payments and they need to guard against inflation risk,” Smith says. “If they invest their entire balance too conservatively, as inflation takes off over the next couple of decades, they won’t have an appropriate asset allocation.
“So, we’re trying to make sure members keep the bulk of their retirement savings in a balanced or growth-style investment, with a proportion in cash.”
Smith says many REI members are now moving out of the accumulation phase and this approach is in line with this transition.
In REI’s new investment mix, regular pension payments and partial lump-sum payments are initially made from the cash option and then from the balanced option, in the event the portion invested in cash is insufficient.
To ensure a minimum balance in the cash option is maintained, each member’s account will be rebalanced annually in line with REI’s age-based structure.
Smith says the calculations by age bracket are simply based on minimum allocated pension drawdown factors the Australian Taxation Office has set.
“For example, if you’re a member under 65, you’ve got a minimum drawdown factor of 4 per cent of your balance per year,” Smith explains. “What the 8 per cent cash represents [in this new product] is two years’ with pension payments. The logic is that if equity markets fall, the area that members draw their pension from is that 8 per cent worth of cash that’s capital protected.
“What we’re trying to do is protect people’s short-term capital drawdown needs and that scales up across the ages. Each of the cash options is, in effect, two years’ worth of minimum pension payments.”
Smith says that although the growth component of the portfolio is potentially affected by short-term negative movements in equity markets, REI expects most of those markets to have recovered within one or two years.
“So, you’re keeping your long-term investment profile for 20 or 25 years intact but quarantining two years’ worth of cash drawdowns in the cash bucket,” he says. “We’re effectively taking the profits each year out of that growth or balanced option and transferring them back into the cash capital-protected bucket.”
Smith says the fund is also taking responsibility for the once-a-year rebalance of the portfolio, shifting the onus away from the member.
A new way forward
There are limitations to REI’s new product, Smith acknowledges, but he says it should provide a stepping-stone from which the fund can make future enhancements, especially with regard to older members.
“We hope legislative uncertainty [around pension phase products] gets sorted out so the industry can create more products for people in this part of their retirement,” Smith says. “In the meantime, this was designed to be a first step.”
While new pension members of REI will default to this age-based investment mix, they can still mix and match as much they like. Existing pension members can also opt-in to the new product.