Post-accumulation phase options are focusing superannuation fund attention, challenging administrative and custodial approaches to lifecycle products.
Frontier Advisors recently wrote about default lifecycle strategies in MySuper options, noting that June 2018 data from the Australian Prudential Regulation Authority shows lifecycle strategies account for about 30 per cent of all MySuper products in the market and 35 per cent of total MySuper assets.
Frontier noted in a report in The Frontier Line that the “main weakness in a default lifecycle strategy lies in its blunt mass customisation approach”, and “the belief that a default product can be created which is suitable for all members, regardless of individual circumstances, is itself flawed.”
The blunt approaches of lifecycle product design extend to administration and custody, said David Carruthers, principal consultant, head of member solutions at Frontier Advisors.
Two ways to do it
There are two ways that funds can implement lifecycle strategy,” Carruthers says. “It’s not exclusively this way, but it’s split – industry funds do it one way, retail funds do it another way. In industry funds, young members will go into the default fund and then when they turn 60 or whatever age they determine, they’ll physically move the assets from the balanced fund to the conservative fund.
“From an administrative point of view, it’s easier to say, everyone who turned 60 this year, we’ll move them on one date. From a custody perspective, that’s also easier – but it’s a blunt way. It doesn’t take into consideration where the market is. If you turned 60 in December 2018, the market had dropped, and if you’d moved assets then, you would have missed the uptick that’s happened since then.”
The other approach, seen in retail funds, is that when members join a lifecycle option, they are placed in a fund that reflects their year of birth.
“The way the retail funds do it, for their own reasons, when you join the retail fund, they’ll put you in a single fund that typically reflects your age or your year of birth,” Carruthers explains.
“Somebody might join a fund which is called, 1990-95. They’ll stay in that fund for the rest of their career in superannuation, and the asset allocation for that fund will slowly change over time. That makes it somewhat easier, potentially, from an admin point of view. People aren’t moving from fund to fund, there are no custody implications, but the asset allocation is changing all the time and you also need a lot of funds.”
Both approaches flawed
The challenge to both of these approaches is that they don’t take into account critical information about members, such as account balances and work patterns that may necessitate a more tailored asset allocation approach.
“At the moment, we’re a few steps away from having the administrative tools to do that sort of thing, both in terms of working out what should happen for each member, and then in working it out on a member-by- member basis,” Carruthers notes.
Another challenge on the horizon for fund administration is that as members move from the accumulation phase into the stage where they start to use their funds for income, the assets in fund options will have to be redistributed.
“When you move from, say, balanced to conserve, you sell high-growth asserts like queries, and buy defensive assets like bonds,” Carruthers says. “The issue comes about that you’ll also be selling less-liquid assets like property, infrastructure, private equity, etc. Because they’re less liquid, the fund itself won’t necessarily sell those assets, but redistribute them somehow. That’s OK for a fund that’s expanding and having more members join the balanced fund than leave the balanced fund, but if it’s a fund that’s got negative cash flow, that creates challenges.”