Superannuation funds need to recognise that volatility in an equities portfolio is a two-dimensional problem that can erode retirement balances, Parametric believes.
The fund manager said too many responses to volatility were one-dimensional and looked only to smooth out the journey for members, ignoring the damage that volatility, or expensive volatility responses, can do to end retirement balances.
Parametric director for research and after-tax solutions, Raewyn Williams, said: “All approaches to volatility need to stack up against their ability to solve both problems for members. Funds should not be willing to casually trade off their members’ destination (retirement savings) for a smoother journey, assuming they cannot deliver both”.
Williams said the Financial System Inquiry comprehensive income product for retirement (CIPR) solution showed that it was not acceptable for a fund to deliver risk management at the expense of a member’s income needs, or vice versa.
“The CIPR blueprint should further encourage superannuation funds to look for solutions to solve the journey and destination problems, especially as a growing number of their members move towards transition to retirement or retirement itself,” Williams said.
“A viable equities approach to downside risk in volatile times is a solution that genuinely protects the member from the risks he/she cares about (like volatility or downside risk), but avoids costly protection solutions that undermine the member’s capacity to keep building a retirement balance.”
