POWERED BY MOMENTUM MEDIA
Separate assets and needs for pension portfolios
Superannuation funds need to develop default pension portfolios designed to deal with short-to-medium term volatility without upsetting their sustainability and prospects for long-term growth, according to a Rice Warner.
It said risk-averse people entering retirement and paranoid about investment losses placed about $5 billion into bank term deposits even though these only paid about 2.5 per cent and interest rates were predicted to stay low for the foreseeable future.
It said a default pension portfolio should meet two primary needs of retired members:
- Certainty of short and medium term cash flow to meet the pension payments which are required for current living expenses and financial contingencies; and
- Growth of their capital so future cash flow is sufficient to meet future expenditure needs, no matter how long the retirees live. In other words, the investment must provide inflation and longevity protection.
"They impose competing investment objectives that cannot be met through a traditional investment strategy," the analysis said.
"Short-term income needs demand income from liquid assets that cannot provide sufficient growth to meet a portfolio's long-term objectives.
"Long-term protection against inflation and longevity demands investment in growth assets that have inherently volatile market prices; and asset values could be depressed when cash is needed."
Rice Warner said the optimal solution required a separation of needs and a separation of assets to meet those needs.
Rice Warner proposed a multi-bucketed approach solution as:
- Most of the retiree's superannuation assets are held in the account-based pension with investments allocated similarly to a traditional balanced portfolio, adapted to meet the needs of retirees; and
- The cash account receives the distributed investment earnings from the account-based pension to pay the pension to the retiree and to build-up a cash store for contingencies.
Rice Warner also suggested that super funds should use a bucketed approach but park 15 or 20 per cent of the member's benefit into a pooled arrangement for the later years of life as it would be difficult to predict how quickly a retiree should draw down on their capital.
Recommended for you
The Future Fund’s CIO Ben Samild has announced his resignation, with his deputy to assume the role of interim CIO.
The fund has unveiled reforms to streamline death benefit payments, cut processing times, and reduce complexity.
A ratings firm has placed more prominence on governance in its fund ratings, highlighting that it’s not just about how much money a fund makes today, but whether the people running it are trustworthy, disciplined, and able to deliver for members in the future.
AMP has reached an agreement in principle to settle a landmark class action over fees charged to members of its superannuation funds, with $120 million earmarked for affected members.
TOP PERFORMING FUNDS
ACS FIXED INT - AUSTRALIA/GLOBAL BOND
Fund name
3y(%)pa
1
DomaCom DFS Mortgage
76.97 3 y p.a(%)
2
Global X 21Shares Bitcoin ETF
76.46 3 y p.a(%)
3
UBS Solactive Global Pure Gold Miners UCITS ETF Dis USD
51.13 3 y p.a(%)
4
Global X GlobalX FANG+ ETF
45.15 3 y p.a(%)
5
Select Baker steel Gold Institutional
43.78 3 y p.a(%)
