The haemorrhage of members to the self-directed segment of super is a prime example of an industry distracted by its default system obligations, writes Nathan Bonarius.
What has been the opportunity cost of developing sound default strategies for superannuation fund members?
New evidence shows a harsh reality that the industry’s recent preoccupation with MySuper may have seriously impeded the focus on superannuation’s main game, members with the option to choose their fund.
The haemorrhage of members to the self-directed segment of superannuation is a prime example of an industry distracted by its default system obligations.
Rice Warner believes that developing a good default option should be a key objective of every superannuation fund. However, to focus product development solely on MySuper, at the expense of Choice, has created certain commercial limitations.
Have the demands of Choice members been met in recent times? Not really. Choice members make up the majority of assets in the superannuation industry. They have an average balance four times that of MySuper members.
“The recent Financial System Inquiry recommendation for funds to offer a Comprehensive Income Product for Retirement (CIPR) will give the market an innovation kick-start after a long period of focus on default products…”
A quick look at the rapid rise of self-managed superannuation funds (SMSFs), which represent one-third of total industry assets, tells us that some one-million fund members are now managing their own retirement savings, despite a general lack of investment expertise and certainly the absence of any scale benefits.
Further, the industry fund sector, despite its strong brand, has attracted only 2.5% of retirement assets.
Yet change is afoot. Funds have recognised the value of retaining high balance Choice members and have begun a number of retention strategies, including:
- Expanding the range of Choice investments available.
- Member direct services such as individual equity securities and term deposits.
- Pension product transformation.
- Offering sophisticated member and financial planning services.
Some of the strategies have not been successful. In order to service Choice members well, funds need to be able to profile when members will be ready to make a choice, engage them early and understand their needs. Rice Warner’s annual Super Insights study allows funds to benchmark such members against the universe of members in the market.
For example, three interesting insights that come from this study include:
- Age is a simple proxy for when members will engage:
- Only 10.5% of members aged under 25 select their own investment, but this rises to 29% by age 65.
- Choice members are more conservative:
- The asset allocation of Choice members is generally more conservative than MySuper members. Allocation to growth assets falls linearly with age from 72% to 42% by age 65.
- The difference in average growth allocation varies from 10% to 30% over a members lifecycle (see Graph 1).
- The average pensioner doesn’t vary his or her asset allocation in retirement:
- Interestingly, the allocation of pension members in our sample is relatively constant until approximately age 80.
- From age 80, allocations to growth assets actually increase.
We recognise that this is not likely to be a result of an active choice at advanced ages. Rather, it is more likely to be a function of members with higher growth allocations having their money last longer (or having larger balances to begin with) rather than an active decision made by individuals.
Perhaps wealthier retirees understand the value of growth assets and they also live longer than poorer retirees.
Such nuances represent only a small part of the complexity of the Choice universe and demonstrate the need for funds to understand their members better. In this case, to offer the right suite of Choice investments and to develop retirement products which assist pensioners’ money to last well into their retirement.
The recent Financial System Inquiry recommendation for funds to offer a Comprehensive Income Product for Retirement (CIPR) will give the market an innovation kick-start after a long period of focus on default products with the MySuper reforms.
This article was originally published on Rice Warners Insights Blog
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