- BRW Lists
Published 04 April 2013 10:13, Updated 05 April 2013 10:47
One consequence of the GFC was a shift in America to life-cyle investing products for retirement savings to better tailor a portfolio’s risk profile to the age of the investor. Roy Johnson, of Mableton, Georgia was one of a large number of American seniors to lose their homes during the crisis. Photo: New York Times
The US’s budget deficit and pension funding crises are not examples I’d like Australia to follow, but they have helped produce one trend that we should emulate: life-cycle investing.
More than 50 per cent of the new money flowing into US defined-contribution pension plans is being invested in life-cycle funds, which change asset allocation depending on the member’s age.
The typical default fund in Australian superannuation schemes is still the same as what America’s used to be: a mix of about 70 per cent growth assets, mostly shares or stuff with equity-like returns, such as property; and 30 per cent defensive assets, which are mostly fixed income and cash.
The problem is that this mix applies to all members, whether pimply 15-year-olds in their first after-school job, or a 64-year-old person staring retirement in the face.
When market collapses occur, such as those that wiped out 27 per cent of a typical 70:30 fund’s value in 2000-03, or 44 per cent of it in 2008-09, the 64-year-old loses a big chunk of his or her nest egg just when it is needed most.
This prospect is especially frightening in countries with less of a social safety net than Australia – presumably this is what has galvanised Americans into adopting a life-cycle approach.
Nevertheless, a few Australian super funds have decided that one-size-fits-all is no longer fit for purpose. Queensland’s big public sector fund, QSuper, has fenced off its members aged over 58 from everyone else (they can opt out if they like) and furnished them with a defensive investment strategy that focuses on their impending liabilities rather than endless growth.
Meanwhile, Mercer will implement a life-cycle default strategy for its corporate super funds later this year.
The life-cycle investing revolution that’s under way inside publicly available super funds should not go unnoticed by trustees of the self-managed kind. The commonsense behind a structure that treats a 34-year-old differently from a 64-year-old can benefit all investors.