Australia’s superannuation system is not dealing adequately with inflation risk, particularly in the post retirement space, according to Milliman senior consultant Josh Corrigan.
For members in the accumulation phase a typical 70/30 split growth strategy structured around providing access to risk premia was probably appropriate, given that these investments had historically outperformed inflation, Corrigan told a workshop session at the Institute of Actuaries of Australia conference in Sydney yesterday.
But inflation could perform very differently to investment markets over a short period of time, and people could suffer significant declines in standards of living as a result, he said.
“The retail sector really needs to think through some of those issues and come up with products that are structured more appropriately,” he said.
Session chair Jeremy Cooper, Challenger’s chair of retirement incomes, questioned whether there were adequate incentives for super funds to manage inflation given the hedging costs and difficulties associated with doing so.
Because default strategies in super are defined in terms of “inflation plus ‘x’ per cent”, there is a recognition that inflation is important, but a lot of investment managers are not managing that explicitly, according to Corrigan.
But because they are managing wealth over longer time frames dictated by large mandates of three to five years or longer they are more focused on trying to generate risk premia in a nominal sense that they hope outperforms over those time frames, he said. “I think we’ll go down the path of more tailored and structured approaches to the post retirement sector. The concept of inflation-based hedging will become a lot more important relative to relying upon markets and risk premia to outperform inflation.”
