CSC chief Damian Hill says the primary considerations in managing assets for retirement income is the volatility of market returns and permanently losing capital.

Commonwealth Superannuation Corp’s long history in managing pensions for federal government employees gives the fund unique insights to investing assets for retirement. Unlike many of its peers who are less advanced in operationalising the Retirement Income Covenant strategy.  

“Our first aim is not a CPI-plus aim, that’s a secondary outcome for us. [The key element of asset liability management] is that it changes your view of risk,” CSC chief executive Damian Hill tells Investment Magazine. 

“It’s not just chasing market returns; it is the volatility of those market returns and permanently losing capital that come more to the forefront when you do that because you’ve got something that you’re particularly aiming at.” 

He says the fund refers to itself as “a liability manager, not an asset manager”.  

“[Asset liability management] is how we structure our whole investment thesis. We haven’t just done it only for our [defined benefit] funds.”  

‘Comfortable’ retirees 

The Association of Superannuation Funds of Australia calculates a couple will need around an annual income of $70,000 a year and a single person $50,000 in order to enjoy a comfortable retirement.  

“We are cohorting for our whole member base and not just those who are coming close to retirement,” he says. 

“We have for many years mapped out our [defined contribution] customers against a liability by reference to the ASFA comfortable standard.” 

CSC has just under 250,000 members currently drawing a fortnightly pension, totalling around $380 million a fortnight while its DC membership base is in the thousands, a fraction of its DB members.  

Many of its members enjoy a higher income and would have little difficulty in hitting the ASFA comfortable standard income band.  

Our customers are a little different, whether they’ve been in the military or the public service, they have had a reasonable paying, generally full-time jobs with higher contribution rates,” he says.  

“That means more of them are on track to meet the ASFA comfortable standard. Many superannuation funds will have some who are well on track, we would just have more of them.” 

New retirement products 

CSC is looking at developing new products to suit its growing – though significantly smaller – cohort of DC members, Hill says.  

“We have done a lot of work building on the work that we had previously done for our DB customers to understand the various cohorts across both our DB and DC pools and then looking at the types of products that would be best suit those cohorts.”  

Members will have to consider three options around retirement income that will help decide the type of retirement product they may need. The options – which are co-dependent – are whether they want flexibility of capital, the highest return or stability of income.  

From CSC’s work around DC member cohorts and data, an account-based pension may be enough for some cohorts says Hill but “for other cohorts, we believe the optimal product will be a combination of an account-based pension with some longevity product”. 

However as the fund’s DC schemes have been only open since 2005, the number of pensioners is still relatively small and he is confident there is time to appropriately service their needs. 

“We certainly don’t think that we will be inundated with huge transitions, so we’re prepared to take our time listening to and learning from our customers to see what their behaviour is,” he says. “The important thing here is to be flexible and be able to iterate as more and more people reach retirement.” 

The industry is waiting for the outcome of a staggered review of super funds’ execution of the covenant by ASIC and APRA to provide much-welcomed guidance to the new legislation. The regulators will be publishing the results of its survey of a first group of super funds, of which CSC was one of them, says Hill.  

“We were one of those who’ve got tapped on the shoulder, but that wasn’t surprising to us, given our long history of 100 years of actually paying pensions,” he says. 

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