It seemed like a logical progression.
First, we defined what a default option for accumulation should look like under the MySuper legislation, so next we should define what a default option for retirement must be, shouldn’t we?
I would have called it MyPension, if Equipsuper hadn’t already, cleverly so, claimed that name for one of its retirement products.
The problem is retirement isn’t the same as accumulation.
While you could design a relatively intelligent investment option that suits most 25 year olds, people’s lives take many different paths and so by the time they reach retirement their circumstances differ vastly.
This is why First State Super is of the view that the new legislation around the offering of a comprehensive income products for retirement (CIPR) product should not be confined to a single product.
I still don’t think that the industry knows what is intended by the CIPR, to be honest. Everyone that I talk to has a different view on what that means
“We strongly believe that one size doesn’t fit all in retirement,” Jacki Ellis, Portfolio Manager for Retirement Strategy with First State Super, says in an interview with [i3] Insights.
“I still don’t think that the industry knows what is intended by the CIPR, to be honest. Everyone that I talk to has a different view on what that means,” she says.
First State Super is not alone in this opinion. For example, Unisuper has a disclaimer on its website, explaining why it decided to stop the development of its proposed CIPR product ‘FlexiChoice’.
“In light of the continually changing regulatory landscape (including finalisation of the rules for CIPRs) and challenging investment market conditions, it was important—and timely—to reflect on and reassess FlexiChoice’s design, its value to members and ability to stand the test of time.”
Ideally, the final legislation will focus on the need for a framework and the key elements that CIPR products should consider, rather than the need for a single default, Ellis says.
“The view that a CIPR is a single product and doesn’t capture the complexity of member circumstances or age pension eligibility would be very challenging,” Ellis says.
“But you could look at CIPRs as a retirement strategy that can be customised for different cohorts. That way funds can offer multiple solutions with similar characteristics to ensure that members are invested in a manner that is appropriate for their circumstances,” she says.
“For example, if you have a cohort of members where longevity protection is really important, then their CIPR might naturally incorporate that, while CIPRs offered to other cohorts may not. But there are some challenges there. Currently, we don’t really know enough about our members to nudge them towards products that have regret costs.
“When delivering investment strategies to members in retirement, the key is to be flexible enough to be able to respond to their individual circumstances and preferences,” Ellis says.
“We think there is plenty of opportunity to combine a series of underlying building blocks with cohorting or segmentation, to deliver on the complexity of member needs in retirement while continuing to realise scale benefits. It is about getting that balance right and using technology and other tools to guide members to the appropriate strategies for their circumstances,” she says.
Product or Strategy?
Ellis joined First State Super from Mercer in August of last year to focus on retirement strategies from an investment perspective.
“I’m a member of our investment strategy team, and so am involved in all aspects of our strategic and active asset allocation processes,” Ellis says. “I have some particular responsibilities around our retirement strategy and making sure that we have the right tools to understand and target the outcomes that we are delivering to our members.
But Ellis hopes to bridge the traditional divide between investments and products, as a good retirement solution will rely on collaboration from both sides.
“When we talk about retirement solutions in this [superannuation] industry, we tend to either focus solely on the product issues, or go into a lot of detail about the investment side of things. Rarely do I see people talking across the full scope or having an integrated and collaborative view,” Ellis says.
“We feel strongly that the only way to deliver a good outcome in retirement is to have a collaborative approach between investment, product, advice and policy,” she says.
Developing a retirement solution is often about combining different strategies into a sensible package. This can include traditional asset classes, but may also include strategies with more of an insurance element to them.
First State Super has embraced a utility model to help identify the best solutions for members, based on their circumstances. The model is not unlike the MDUF framework developed by David Bell, the former Mine Super Chief Investment Officer, and his colleagues. But First State Super’s model draws on the profile of its members.
“We’ve adopted a utility framework, which is akin to a measurement for well-being in retirement,” Ellis says. “It is a tool which enables you to consider the multitude of retirement goals and the trade-offs that exist between them and to value those appropriately.
When we talk about retirement solutions in this [superannuation] industry, we tend to either focus solely on the product issues, or go into a lot of detail about the investment side of things. Rarely do I see people talking across the full scope or having an integrated and collaborative view
“For example, it measures the probability of running out of money, but also considers the severity of that outcome and penalises it appropriately.
“Income certainty is a goal of most retirees, but it is more important for some than for others. If you think about more wealthy retirees, they are able to self-fund their retirement and think of bequests, and are typically able to withstand greater variability in their income.
“Anecdotally, through our advisers, it seems that most of our members are okay with accepting a small amount of income variability. It is important that we get the balance right though, because income certainty comes at the cost of lower returns over the long term, which lowers retirement income,” she says.
Longevity products, including annuities could be part of the solution, Ellis says.
“Longevity products are an important part of investment strategy in retirement and they can be very effective for certain cohorts of members. But they are not for everyone and involve a trade-off, particularly in terms of flexibility and access to capital,” Ellis says.
“We make longevity products available to our members through our advice platform. We currently have annuities on our approved product list and we may look to expand this.
“We are also in the middle of a research project to support our advice teams in recommending those annuities. In particular, we have been looking at how the recent change in the social security treatment of annuities impacts the value of these products for our members,” she says.
First State Super regularly surveys their members and has a good response rate in getting answers back from them. As such, the fund has a reasonable trove of member data it can work with.
“We are able to look at cohorts of our members and can identify where annuities are not necessarily beneficial to them, instead of relying on the product provider to provide that guidance,” Ellis says.
On the accumulation side, First State Super uses a simple form of life-cycle investing for its default option that switches members from a growth portfolio to a balanced portfolio at the age of 60.
Ellis believes the concept of life-cycle strategies can be refined to help retirees get better outcomes.
“We absolutely believe in life-cycle investing,” she says. “We are in the process of reviewing our life-cycle strategy to make sure that the process and expected outcomes are in line with doing right by our members,” she says.
“What we found, for example, is that investment returns are going to have the biggest impact on the balance of our members from age 45 on. So it is important to make sure those members continue to access appropriate amounts of growth in their investments.
“But our research also shows that sequencing risk really matters.
“In the lead up to retirement, a market fall of, say, 5 per cent, will have a larger than 5 per cent impact on their retirement balance. That outsized impact increases the risk of a poor retirement outcome and can be very disruptive at a time when members face a great deal of uncertainty as they plan for their retirement. So we believe it is really important to manage risk through this period,” she says.
But staying invested and having access to growth throughout retirement is also important, Ellis says.
Members need to continue to take investment risk, but equally, they need to be comfortable enough with that risk to stay invested and stick to their plan. That is why it is so important to manage retirement assets differently
“Members need to continue to take investment risk, but equally, they need to be comfortable enough with that risk to stay invested and stick to their plan. That is why it is so important to manage retirement assets differently,” she says.
“We incorporate risk management into the investment strategy of our pension options to help our members maintain access to strong investment returns, while mitigating the impact of market falls.
“Part of my role is to help refine and enhance that process on an ongoing basis. For example, we’ve done some research to help directly link the income certainty that we hope to provide to our members, to the sector level investment targets that we have for our pension products.
“That has been particularly useful for asset classes like equities or liquid alternatives, where we incorporate explicit risk management.
“We have found it is really important to take a multi-layered approach to risk management. It is not enough to just tweak your asset allocation, you also need to be mindful about the way you are investing the underlying assets too,” she says.