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(July-2003) Age-based defaults can leave retirees high and dry
Age-based defaults typically move members from growth investments to more conservative options as they approach retirement, even though growth is still achievable and often desirable.
Frontier managing director Fiona Trafford-Walker warns that older investors may not understand that they could be sacrificing potential gains by defaulting to less risky investments.
She says: “Be careful in assuming. There is a risk that investors over 55 who go into capital stable options don’t fully understand, and in the next 10 years could lose a lot of return.”
Towers Perrin consultant Stephen Milburn-Pyle adds that disgruntled investors may take legal action. The concern, he says, is that age-based strategies don’t take account of the market environment. “If there’s been three years of bad equities then the market recovers, it may be better to stay with equities, rather than move to bonds. Losses can be crystallised at unfortunate times.”
Trafford-Walker suggests that rather than using an investor’s assumed retirement age to make predictions, funds should look at likely post-retirement investment and expenditure patterns. The latter, she says, is key in determining the likely timing of access to retirement savings and preference for capital stability or income yield as this time approaches.
Most funds assume that this time is at a member’s retirement age. But analysis of post-retirement spending shows benefits are not usually accessed until five to 10 years after retirement.
Members will often have some personal savings on top of their super, which trustees usually know nothing about. This implies members should be defaulted to a growth strategy, irrespective of age.
Even though some older members can afford less aggressive options, people are living longer and may not want to be that cautious, says Towers Perrin director of asset consulting services Paul Laband. “It is a mute point. They may go into an allocated pension, which has growth in it anyway,” he says.
Trafford-Walker says funds can’t assume how older members might behave in retirement or how much they have in other assets. Older members may be independently wealthy and could stay in the high growth fund, using the money to sustain them throughout retirement.
But while consultants believe that assumptions can’t be made for older members, they are less critical of those made for the young. Their view is that younger members have a long time horizon for investment and can therefore ride out the gains and losses of higher risk assets.
Trafford-Walker says it is easier to argue that members below a certain age should automatically be allocated to a higher growth option, than to argue that older members be moved to a lower growth option.
In fact, she believes that younger age-based defaults will prevent members’ money from being mistakenly moved to a more conservative option, which “is disappointing, and commonly reflects their misunderstanding or lack of education”.
Milburn-Pyle says: “If they have over 10 years before retirement, the strategy may not be that different for, say, a 25-year-old and 45-year-old. Age is only important when they want to use all their assets within 10 years.”
Trafford-Walker says many funds have looked at age-based defaults and decided not to implement them. And Laband believes that the use of age-based defaults is not that common. A few of his clients offer it, but these are the exception, he says.
Funds such as Health Super, Local Super SA-NT and Telstra have opted for the age-based default approach. However, VicSuper scrapped its system and HESTA decided against ever implementing one.
On the other hand, Goodman Fielder Superannuation Fund is now considering the use of age-based default options, partly because of the negative return environment and partly due to the historical structure of the fund.
Fund secretary Peter Lambert says: “I would prefer everyone to make a decision but if people aren't active, we want to be more intuitive in where we place members.”
He says the bulk of his fund’s members sit in its growth option because before member investment choice, the fund had a growth approach, so members stayed in growth unless they actively chose otherwise. The concern and driver for considering age-based defaults is that some of these don’t understand risks and returns and may be in the growth option for the wrong reasons.
AUTHOR
Zilla Efrat
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