This article was produced in partnership with T. Rowe Price.

As regulatory and public scrutiny ramps up on decumulation, the mission statement of ‘delivering the best possible member outcome’ in Australia’s $3.5 trillion pension sector has just become even more complicated. Stepping out of the return-based objectives in accumulation, super funds have found themselves grappling with a different beast when investing for retirement.

In a roundtable hosted by Investment Magazine and international asset manager T. Rowe Price, investment professionals from top Australian super funds came to the consensus that anyone who thinks there is a silver bullet for solving retirement is probably in for some disappointment.

Sébastien Page

In helping members to find the best solution, the process needs to rely on personalisation and guidance, the roundtable heard. However, there is the unignorable reality that many members are not as engaged as funds would like them to be prior to retirement.

“We’ve got 2.3 million members and we have five behavioural segments washed over the entire membership, and 60 per cent of those members aged over 60 are what we would describe as underprepared for retirement,” said Anne Fuchs, executive general manager of advice, guidance and education at Australian Retirement Trust (ART).

“What that means is they would rather go to marriage counselling followed by the dentist, than talk to us about money or even look at their account.”

T. Rowe Price’s Baltimore-based head of global multi-asset and chief investment officer Sébastien Page said the US is facing a similar conundrum.

“If you’re a mechanic, a school teacher, or a doctor, and you have a 401(k) plan, you’re not interested in going online and making your investment choices,” he said.

“We as an industry, especially the defined contribution space, have not figured this [retirement] out yet. The accumulation phase, I think we have. The decumulation phase, we’re looking at a graveyard of financial products launched over the last 10 years.”

Craig Hurt

Two-thirds of T. Rowe Price’s funds under management are retirement-related. The firm recently conducted a detailed questionnaire with its recordkeeping members to understand what different retirees are willing to offer as trade-offs in their retirement solutions. For example, some retirees may be willing to forgo a certain part of their monthly payment to maintain a good balance.

However, retirement expectations are complicated and it’s hard to meet all of them at the same time, Page said, which is why the survey was designed to “force” retirees to make a choice about what is the most important capability to them.

“When you ask a participant or retiree what they want, it’s like how the song goes: ‘I want it all and I want it now’. They want high payments, stable payments, liquid balance that won’t fluctuate, and they want the money to last for a lifetime,” he said.

T. Rowe Price global solutions portfolio manager Richard Coghlan added that while the questionnaire can be quite repetitive for this reason, a detailed approach was necessary.

“By trying to get closer to members, and really understanding their situations, we have a better chance of coming up with products that will best serve their retirement outcomes,” he said.

L-R: Ben Hillier, Richard Coghlan and Michael Winchester

Financial advisers have “a very real role for those who choose to hire them, but part of the problem is a lot of people don’t hire advisers”, Coghlan said.

“If we’re going to come up with a solution [for retirement income], it has to take into account the fact that some people aren’t going to get that advice.”

Annuity tales

Outside of pension plans, Page said annuities are on the rise in the US. According to research company LIMRA, the nation has seen a record level of annuity sales (US$385 billion) in 2023, mostly via insurance companies and financial planners.

However, annuities remain a relatively small part of the market in Australia compared to account-based pensions, with some funds exploring the possibility of integrating the two options to provide retirees with both income certainty and opportunities to capitalise on growth assets.

AMP’s director of retirement Ben Hillier is of the view that an account-based pension might not be the most efficient way to fund retirement.

“I use the analogy a lot that an account-based pension or drawdown account is like a water tank with a tap installed at the top, and people will try and preserve the capital and just live off the overflow,” he said.

“A lot of the annuity take-up in the US has been tax-based, and a lot of the take-up in Australia is social security-based. These are useful levers and an important barometer in gauging the importance of guaranteed income and security the closer people are to retirement.”

Precisely due to these solutions’ nuanced pros and cons, both Hillier and ART’s Fuchs are among many in the industry who believe selecting retirement solutions should be a guided process, though there are still differences of opinion in the sector on whether that should happen within the intra-fund advice realm.

Clockwise from top left: David Bell, Maggie Davis, Anne Fuchs and Geoff Warren

“We don’t believe, as part of the quality of advice review, that things like annuities fit within intrafund advice. They are complex products,” Fuchs said.

“If I’m being really plain, I think the industry is very good at creating complexity. Dare I say, maybe there are too many clever people around, when ultimately what we need to do is to create simplicity.”

‘Pain point’

AustralianSuper’s director of portfolio strategy Maggie Davis added it’s important to debunk the myth that retirement is a one-time event. Before relocating to Australia and joining the $320 billion mega fund, Davis had roles with one of Canada’s Maple Eight pension funds BCI, and insurer Sun Life.

AustralianSuper has proposed an “account for life” structure where members do not have to re-apply for fund membership when they move into an account-based pension and are allowed to recontribute income to their super fund if they wish. The idea is to minimise friction between life stages.

“That transition from accumulation to retirement is such a pain point at the moment…and is causing a problem,” Davis said.

“Because people think retirement is a one-time decision, and it’s irreversible, they’re not switching into those retirement accounts and not taking money that they might have on the table.

“But retirement is a different type of transition. It’s not that one day you’re just retired – we need to think about how we can create that ability for members to retire a couple of times.”

Jemma Beattie

Mercer’s strategic investment leader Jemma Beattie said that the government also has a strategic role to play in allowing creative retirement solutions to flourish.

“I think its retirement commitment should be twofold,” she said.

“One should be not to overly interfere in the process… in ways that will hinder innovations that are being developed to support members. And secondly, on the education piece, I think the government should take some responsibility to help bridge that gap.

“[The UK’s PensionWise] is a big service and unfortunately not very well utilised. But I do think the [Australian] government should take some responsibility and create something similar.”

Building blocks

Earlier this year, the Conexus Institute, an independent think tank philanthropically funded by Conexus Financial (publisher of Investment Magazine), released a research paper ‘Investing for retirement‘ on the investment needs of retirement and teased out the idea of having two separate portfolios for accumulation and decumulation.

This would facilitate the difference in their objectives. For example, while investing for accumulation is about generating maximum risk-adjusted returns, decumulation will have the extra layer of a liquidity management goal.

Geoff Warren, research fellow at Conexus Institute, explained that the idea is to explore investment teams’ role beyond providing a “canned” solution in retirement. Their objective should be to provide “building blocks” that can be selected to create various retirement solution mixes.

“We actually think two core building blocks would do the job, but you could provide more,” Warren said.

“The first is a growth portfolio – as growthy as you can manage – in order to generate returns for those who want higher returns and therefore higher potential income,” Warren told the roundtable.

“The second is a capital-stable portfolio, which is not a traditional defensive portfolio. It’s actually a portfolio which would primarily be used for precautionary savings – a rainy-day fund. And the idea is to manage it to remain relatively stable in real terms.”

The $160 billion Aware Super is one fund where pension assets are managed differently from accumulation assets. In fact, there is a dedicated retirement strategy team of five that sits within the investment team, influencing the implementation of investment strategies.

“We’re managing money for people, not just managing portfolios.” – Aware Super head of investment strategy, Michael Winchester.

The fund adjusted its lifecycle design three years ago, aided by the retirement team’s research, which Winchester said is the “single most impactful thing” the investment team has done to improve member outcomes.

“And it doesn’t involve being smarter than everybody else, finding the best stock, or picking the market,” he said.

“It’s just taking advantage of the fact that there’s a third dimension in investments, which is time, that many people don’t really think about.”

When investing for pension members, equities is one asset class that is naturally managed differently due to its higher risk profile, said Winchester. But the fund is careful around alternatives as well.

“We know that members have different risk preferences,” he said.

“A small fluctuation in their income is quite well tolerated but very significant fluctuations in their income, particularly early in retirement where there is a big impact on sustainability, are really not well tolerated.

“So if you want to be able to change the shape of the distribution of retirement outcomes, alternatives are a really great place to go looking where you can get complex solutions and tailored management solutions.”

Silo risks

However, others at the roundtable were on the fence about whether retirement needs a separate team. Principal of strategy and planning at AustralianSuper Yue Cao said depending on the size of the organisation, the pros and cons of that approach would “weigh differently”.

“I agree with the idea of retirement needing a closer link with the investments, the product, and the service teams, because there is a high level of personalisation needed,” she said.

L-R: Sébastien Page, Yue Cao and Scott Tully

“But does it necessarily translate into a separate team, or sub organisation? I don’t think so.

“And if we introduce organisational complexity in a fast-growing team, it may bring silos.”

However, executive director of the Conexus Institute David Bell remains confident in the sector’s ability to innovate.

“I understand that funds face many pressures to not introduce too much complexity in their businesses… but I also heard the discussions of funds incorporating annuities and other lifetime income products, and I know the difficulties of that are probably far greater than offering a dedicated investment portfolio [for retirement],” Bell said.

“If we’re prepared… I do feel quite open-minded that we could take on the challenge of constructing dedicated retirement investment portfolios.”

Bell and Warren will further unpack findings from the Conexus Institute’s performance test and investing for retirement research at the upcoming Fiduciary Investors Symposium in the Blue Mountains. All photo credit to Simon Hoyle. 

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