MySuper shifts Australia super investment mindset

MySuper shifts Australia super investment mindset

MySuper shifts Australia's super investment mindset

  • 23 January 2014
  • Australia, Melbourne
  • 116 MySuper approved products as of January 2014
  • Number of lifecycle investment options more than doubled since the introduction of MySuper and growth expected to continue
  • Focus now needs to shift to managing money through retirement, not only to retirement

 Read MySuper Market Trends Report

MySuper reforms have changed the Australian superannuation landscape according to the latest MySuper trends analysis by Mercer.  An influx of APRA approvals in late 2013 has seen the number of licensed My Super products rise from 82 in November 2013 to 116 in January 2014. Twenty two of the 116 (19%) are lifecycle options, which is more than double the amount available prior to MySuper.

The first of January 2014 was the deadline for superannuation funds to have an approved My Super product to receive default contributions and it marked a significant milestone in the way many Australian default members’ savings will be managed in the future. 

Mercer’s analysis highlights that although the traditional approach of employing a static Strategic Asset Allocation (SAA) continues to be the most popular under the MySuper framework, there is a clear increase in the prevalence of lifecycle funds in Australia.  Mercer’s analysis also reveals significant differences in the construction and implementation of these lifecycle options.

“It’s often noted that not all static ‘70/30’ default options are built the same, which is equally the case with lifecycle options. There are many layers to the debate about what constitutes the best lifecycle glidepath and ideally it should be tailored to each fund and its member demographics,” said Mercer’s Head of Investment Consulting for the Pacific Market, Graeme Mather.

“Important considerations in comparing lifecycle funds include factors such as whether it manages an individual’s savings throughout their lifetime as opposed to only their working life; what percentage of savings will be in growth assets in retirement, and what age assets begin to move from high to low risk options,” said Mr Mather.

Mercer’s MySuper update found only eight of the 22 approved lifecycle funds invest ‘through’ retirement and 14 invest up ‘to’ retirement; the average age at which de-risking begins is 46, but the youngest is 24 and the oldest is 75; the average allocation to growth assets at retirement is 38% with the maximum 89%, the average allocation to growth assets at the beginning of a member’s working life is 88%.

“We know around two thirds of individuals’ retirement income will come from returns earned during the post-retirement phase.  We therefore believe it is important for retirees to maintain a reasonable level of exposure to growth assets,” said Mr Mather.

There is also a clear divergence between how retail and industry super funds are adopting a lifecycle approach. 

There are broadly two options to implement a lifecycle default option: one is ‘member switching’ where members are automatically switched across the funds’ existing options at set ages; the second is ‘cohort funds’ which requires the development of a range of investment funds to benefit various age groups, rather than switching to different funds.

Of the 14 retail funds with a MySuper lifecycle option only four have a ‘member switching’ approach and 10 have developed cohort funds.  Only one Industry fund’s MySuper lifecycle option has a cohort fund and three use a member switching approach.

“MySuper has rocked Australia’s superannuation boat by challenging the long-standing investment mindset of super being purely about wealth maximization to it being more outcome focused and primarily about delivering an adequate and sustainable income,” said Mr Mather.

“The significant increase in the number of lifecycle investment options in the market place is encouraging.  It’s still relatively low compared to static SAA defaults, but we’re coming from an incredibly low base, so really we’re moving in the right direction at a solid rate. 

“We expect the trend of increasing lifecycle options will continue.  We think a lot of funds are conceptually comfortable with lifecycle but still have to get their head around how to implement and administer it.  There are perceived challenges that we believe can be overcome and we expect the number and nature of the solutions will evolve over time.

“The super industry will be starting 2014 in the hope that the bulk of industry reform has now been navigated. However, the reality of the increased compliance requirements and pressing need to shift attention to improving the options available to retiree members will mean there is likely to be little respite,”  he said.

About Mercer

Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerAU @MercerInsights