The problems members face in retirement can’t be solved by investments alone, and  funds where the entire organisation is structured around the presumed, and perhaps traditional, primacy of an investment team will have a hard time meeting their Retirement Income Covenant (RIC) obligations. 

Speaking on a panel at the Investment Magazine Fiduciary Investors Symposium, Team Super CIO Seamus Collins said it was “a challenge we’ve seen play out”. “We recently appointed a chief retirement officer, but she’s located in the advice and engagement sleeve,” Collins said.

“She’s been outstanding – ex-Aware Super, Sarah Forman – at forming working groups, steering groups, because she’s said we can’t do this out of this [investment] sleeve [alone]. 

“It’s got to be investments, marketing, technology, advice, you’ve got to engage the whole fund. A lot of super fund structures are very siloed, and [the retirement] issue cuts across all of those. It’s quite a challenge, and a lot depends on funds having to be stronger and better collaborators than perhaps we have in the past.”

Dr Geoff Warren, research fellow at The Conexus Institute*, said it is “really important that the retirement mission is owned at the top end of the organisation”. 

“If the CEO is on-board and the board is on-board and pushes it down, it will happen,” Warren said.

“And if they think retirement is a low priority, it probably [won’t] be. Regardless of what structure you put in place underneath it, you’ve got to empower the person who is trying to co-ordinate the organisation.” 

A core strategy 

Shang Wu, retirement strategy portfolio manager, Aware Super, said that while the MySuper default is appropriate in accumulation funds “don’t have the equivalent regulatory environment for retirement, and that has a huge impact on their final outcomes”.

“On the business side, if you want to be leader in this market, what is the risk-return profile you need?” he said.

“No one’s going to be the top performing fund forever. If that’s the case, where [do] you want to be strategically, and… can the investment outcomes support your business strategy?

Wyatt Lee, head of target date strategies, multi-asset division, for T. Rowe Price said that even if members were interested in making decisions when they reach decumulation – and many aren’t – they’re simply not equipped to. 

But many of the decisions they must make are much broader than just investing. 

“There’ll be panels like this, talking about retirement income, and somebody on the panel will invariably say, there’s no silver bullet,” Lee said. 

“But then what we see is…  their firm comes out with one retirement income strategy, and they tell everybody it’s the greatest thing in the world. That doesn’t work.” 

Diverse outcomes 

Lee said funds must provide retirement income solutions that offer “a range of diverse retirement outcomes” but which are also “holistic and complete”.

“Many retirement income strategies come to market, and they solve one part of the problem. And for me, it’s just not enough to solve that one part,” he said.

“Making your very hard problem slightly less hard doesn’t solve the problem. I’ll see providers out there who say, ‘Well, we’re going to give access to somebody with a longevity annuity that kicks in late’. So, you buy the annuity, but then they never give any information about how you navigate between age 60 and 80 or age 65 and 80, when that annuity kicks in. You need that kind of holistic approach throughout life.”

Lee said surveys conducted by T. Rowe Price suggest that “people have different perspectives of what they want”.

“Nobody wants specifically one thing, but they want some guarantee and some flexibility. They want to think about the volatility of payment versus something else,” he said.

“If you only focus on one of the elements, if you only focus on longevity or you only focus on maximising income, the solution isn’t necessarily going to resonate.” 

Warren said that “things change a lot” for members when they retire, and how a fund supports them also must change.

Investing won’t cease to be important, but it will become part of a broader set of solutions and need to deliver different outcomes. 

“What that means is that the investments are playing a supportive role within what we call an ‘integrated retirement solution’,” Warren said.

“The investments could sit alongside an annuity or a lifetime income stream, and it’s going to be joined with a drawdown strategy to deliver income and perhaps give flexible access to funds along the way. That changes what the investment team needs to do.” 

Investments in a support role 

Warren said it should be the role of the investment team to “support whoever designs the retirement solution”, and a simple way to do that is to “deliver portfolio building blocks” rather than a balanced portfolio.

“What could happen is a growth portfolio would be delivered to maximise income. It would be coupled with some defensive [assets] and maybe it’s not a traditional defensive fund. It could be actually a capital stable fund which delivers capital protection,” he said.

It is legitimate to ask how portfolios supporting retired members need to be managed differently, Warren said.

“Do you go for downside protection? There are two reasons why you do that,” he said. 

“One is you’re in drawdown, so therefore you could have sequencing risk. The second is, because members do not like downside volatility, and they seem to like it less in retirement.”

The move from a taxed environment to the no-tax pension environment also comes into play which “makes franking credits more meaningful, so that might tweak the way you manage it”.

Warren said when a member moves into retirement there’s little place for long-duration nominal bonds, because they will not produce a return that protects the member against inflation. 

Retirement solutions also need to consider members’ liquidity needs and to think about them at an individual member level, rather than at a portfolio or fund level. 

“If you’re a super fund, you’re not the member, you’re managing a pool and that pool’s liquidity needs could be different to the member’s liquidity needs,” Warren said.

“You might or might not need to manage liquidity more closely in your retirement portfolio. And the other thing is, members need income in retirement. I’m a sceptic of income investing. When you’re in super you don’t deliver them income, they draw from their asset value, so it’s irrelevant, it’s a furphy.” 

No de-risking in retirement 

Wu said Aware has been using a lifecycle approach to investing “for decades, and we don’t de-risk during retirement”.

“One big reason is we don’t know what the retirement solution structure will look like in the retirement phase, and this has a huge implication on our portfolio,” he said. 

“There is a lot of potential to push your glide path design towards [retirement], because it doesn’t make sense for us to de-risk our members when we know they’re going to work until 75, a lot of them,” he said.

“At the same time, if we know one fund member wants the money to pay off their mortgage which, given the housing crisis, is likely to happen, it doesn’t make sense to have them invested in 50 per cent growth assets at the point of retirement. It depends on the purpose of that individual and that personalisation. Bringing your glidepath design into the individual level in a scalable way – not through financial advisers, because that’s not scalable to that level – is what I see [as] a future for where we’re moving to.”

Lee said that to task of producing retirement income products in the US is somewhat easier than in Australia because the product providers tend to have deeper knowledge of the individual member.

“We get not only age, we get balance, we get contribution rates, we get the employer contribution, we get salary,” he said. 

“We can then calculate a state pension benefit. Now you’re going from one variable to six, without any [further] member engagement. Then you have the ability to add more to that, to get ultimately more personalised.”

Lee said the product calculates a hypothetical income stream for an individual, which informs an initial asset allocation. 

“But then if you said, well, I want to have an annuity, you can put the annuity in there. That changes the income stream and then comes back through and then gives you a new allocation,” he said. 

Customisation is a driver 

Team Super’s Collins said customisation is a bigger driver of solutions in retirement than it is in accumulation. He said for funds with low member engagement, getting the information they need to support customisation can be a big hurdle.

“Obviously, advice is the gold standard, and this is where retail [funds] do have an advantage, because they’re advice-led businesses,” Collins said.

“They have very strong, holistic data, and they can tailor a retirement for a member. But that doesn’t solve it for the broad mass of the industry. Some of the answer is digital and robo-advice, that kind of thing. But again, we’re a manual fund, we have limited engagement with digital and that kind of area.”

Collins said profit-to-member funds have always been strong on “paternalism and default structures”.

“You have very limited data, so you have used balance and contribution history as a bit of a proxy for wealth and income and potentially extrapolate to pension situation,” he said. 

“That’s imperfect, but you’re then able to start to design investment strategies, to the best of your knowledge, using those cohorts. That’s kind of as far as you can get to before you run into trustee risk constraints around default in retirement.”

“And then when you get to longevity, it becomes almost impossible. The problem with all of the solutions in longevity, it’s an insurance product where, perversely, they take the whole premium upfront in one lump sum.”

Collins said a “whole-of-life view, where maybe you start taking the premiums a lot earlier and in a lot smaller increments” could potentially be part of a default response, but “the regulatory framework doesn’t support that”. 

* The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.