When it comes to retirement, super funds – and pension funds around the world – still have one big question to answer: how do you most efficiently convert retirement savings into a retirement income stream that delivers good outcomes for members?
That question is more pressing for the $190 billion Aware Super than some other funds. It has more pension accounts than any other profit-to-member fund, and with 20 per cent of its FUM in the retirement phase, it pays out $4 billion in benefits every year. “Winning” retirement is at the centre of its corporate strategy – and the fund is “on the journey” to doing that, according to Shang Wu, portfolio manager for retirement strategy.
“We have the right strategy, the right operational model and the right people to work on it. That’s what gets me excited,” Wu tells Retirement Magazine.
But the question of retirement income is also one that that Wu feels the Australian superannuation system is uniquely positioned to answer.
“It’s a massive opportunity for Australian superannuation funds,” Wu says.
“Our system was set up earlier than other parts of the world, and we haven’t figured out a way to efficiently convert retirement savings into income that makes sense for the system and the broader community. When we do, it’s going to be a success not only domestically but probably a role model internationally, and it’s going to be very rewarding.”
That question is unlikely to be answered entirely by investments, Wu says, though they’ll play a key role – part of the reason Aware implemented a lifecycle default strategy that gives members more exposure to risk assets when they’re younger while decreasing that exposure over time.
On the other side of that is retirement product design. Aware so far hasn’t tapped a third-party to help it build a retirement income solution as funds like NGS and AustralianSuper have. It is working on a longevity product design in-house but “may undertake a review as to future arrangements”, a spokesperson said in response to follow-up questions.
But funds also need “collective and collaborative effort” across divisions to solve retirement problems, and Wu helps shape that effort in divisions as varied as advice, member services and product design.
The combination of those services is key to helping members conquer the plethora of risks that can threaten their retirement: market risk, sequencing risk and – often somewhat less obvious – behaviour risk, which was heightened during the recent period of market volatility when this interview took place.
“I wouldn’t say one risk is bigger than the other, but they come at different times,” Wu says.
“You’ve probably seen news about member switching – and that’s the moment it matters the most.
“We have done extensive research in this area and we understand that a lot of members are making these unfortunate decisions to crystallise the loss at the bottom of the market. Lots of them don’t switch back, to be honest, and we know that we need to help them. Over the long-term that’s pretty damaging to them. We do education, we do video webinars, and our advice team is doing a decent job in helping members stay the course.”
Behaviour risk “comes and goes”, Wu says; it’s not that apparent in good times when the market is trending up, but members need to be prepared for when the bad times come.
“When we talk to our planners, they say always stick with your long-term plan, even when the market is doing good,” he says.
“That conversation will reinforce the message when the member is concerned and questioning them about the market and what’s happening, because they can always think back to that initial conversation. And that’s worked really well, because you already set the scene at the time and before the event really comes.”
The different risks – and the solutions – also interact. Aware’s tail-risk program, meant to handle sequencing risk, has a behavioural element: the fund and its financial advisers can point to it as evidence that members don’t need to switch in bad times because their savings are protected.
“When you’re at retirement is when you’re most vulnerable to bad returns and when you have limited capacity to catch up; you run out of employment income and you suffer the most from big losses,” Wu says.
“And at the same time you’re in drawdown; you’re crystallising losses and you have to, in order to support daily living. We know the average investor in the market, especially retirees, are risk-averse. That makes sense, and that’s why you want to provide downside protection, even if that comes at some cost to a return.”
Wu says it is important not only to dampen volatility but also to also reduce the chance that members make poor decisions.
“And the fact that you invest differently is a proposition you can rely on to convince them to stay the course,” he says.
“These two reinforce each other – and we have an advice team that can explain to them how we do this.”
And while other funds think that the portfolio “bleed” that comes with repeat shopping trips to the derivatives market means it isn’t worth the cost – and that inflows act as a kind of quasi tail program that allows them to buy the bottom of the market (if indeed it is only a dip) – Aware swears by it.
Wu says managing tail risk is challenging.
“It’s not easy,” he says. “First of all, you need scale to do it – we have 20 per cent of our FUM in the pension phase. But you also need internal expertise who can actually help you to do it well, because if you don’t do it well it can go in the opposite direction and hurt member outcomes.
“And you need the right process; you need to start from the member needs and respect the data and carry out vigorous analysis, and then form your objective, and then ask yourself how to manage the risk/return trade-off. Once you have those things you have a chance to deliver some good outcomes to members.”
“It’s a question of what you’re aiming for and how you measure success. Are you measuring successful product level performance, the return of the option? Or do you measure yourself on actual member outcomes? The reason my team exists is because we exercise our “member first” philosophy by heart. All the funds say that, but we have dedicated teams and functions delivering that objective.”
Even income-generating assets – controversial in retirement because it’s not clear that they encourage members to draw down on their savings – can have a behavioural impact by providing members with confidence that they won’t run out of money.
But retirement is still dominated by the question of how to get them to spend when super funds have long been fixated on getting them to save, including making voluntary contributions and switching to higher-growth options. But if you look at today’s landscape, Wu says, that’s “gradually changing”.
“The focus of the industry has been on accumulation for the last 20-30 years. It’s just the nature of the system maturity and where it’s at,” he says.
“But I think we’re at the inflection point and funds both domestically and internationally are starting to invest heavily in retirement. That’s for sure going to solve this problem in the next five to 10 years.”
