Are life-cycle funds an opportunity cost to members or a tool for managing a member’s risks through their different life stages?

Most individuals will agree that a person age 60 and a person age 30 are exposed to different risks to their financial assets and probably have different abilities to manage those risks. Not to mention that they also probably have different needs and preferences at these different stages of life. According to the most recent quarterly MySuper statistics from APRA[1], only c. 25% of MySuper products utilise lifecycle funds in some shape or form to manage these different risks as a member age, accounting for approximately 35% of all MySuper assets by value. However, the value proposition of using lifecycle funds as part of MySuper product designs have been challenged by the Productivity Commission in their draft report[2] on assessing efficiency and competitiveness in the superannuation industry:

“As members approach retirement age, the potential impact of a year of poor returns on their balance at retirement rises. Lifecycle products — which reduce the share of growth assets in a member’s portfolio as they age — are intended to reduce this sequencing risk. But most lifecycle products have a relatively modest impact on sequencing risk, while forgoing the higher returns that come with a larger weighting to growth assets (in some cases, from as early as 30 years of age). While these products will always have a niche in the choice segment, their presence among MySuper products (covering about 30 per cent of MySuper accounts) is questionable and suggests many members are potentially being defaulted into an unsuitable product that sees them bearing large costs for little benefit.” 

The Productivity Commission’s assertations are based on the assumption that all lifecycle strategies are the same. This finding also suggests that lifecycle funds are more appropriate for the choice environment as lifecycle funds are viewed as being only suited to those who want to lock in a balance at retirement. For those who do not have this desire, a lifecycle approach has been considered to result in forgone returns, based on asset only measures. 

In order to determine whether lifecycle funds are appropriate for inclusion in MySuper products or not, it is best to start with the objective of the superannuation industry, the role MySuper products play and whether the inclusion of lifecycle funds meet this objective when compared to alternative approaches.


The (proposed legislated) primary objective for the superannuation system is ‘to provide income in retirement to substitute or supplement the Age Pension’[3]. The objective is therefore not to provide an uncertain lump sum accumulated up to retirement, but instead to target a more certain retirement income.

Unfortunately, the misconception exists that more is always better and therefore the aim should be to maximise the accumulated balance at retirement, which is measured in the industry as maximising ex-post time weighted returns on average.

However, members do not experience averaged time weighted returns, but instead experience rolling money weighted returns during accumulation. The focus on the former may therefore lead to unintended consequences and expose members to the risk of getting the timing wrong when they retire, because as the saying goes ‘what gets measured, gets managed’.

Unfortunately, the Productivity Commission’s analysis frames risk in terms of asset returns and account balances only.  Wealth maximisation at an assumed retirement age is not aligned with the superannuation system objective of providing income streams in retirement to substitute or supplement the Age Pension. Instead, a risk-adjusted measure should be used which allows for all the risks a member is exposed to and how these change over time and more specifically the risk of the magnitude and stability of sustainable incomes over long periods. 

What is the role MySuper products play and does the inclusion of lifecycle funds assist in meeting this objective? 

Trustees have a fiduciary duty to act in the best interest of members who have either willingly or through default assigned the responsibility of managing their retirement savings to the Trustees. The current lifecycle exemption in the SIS Act and the allowance for prescribed factors other than age (i.e. account balance, contribution rate, salary, gender and time to retirement) in the MySuper legislations, permits and challenges the trustees to consider the impact of the various risks a member face and the impact on their retirement outcome. As a result, fiduciary accountability is more complex, however it provides greater flexibility for trustees to act where they consider it appropriate for their members rather than being restricted to a one size fits all approach.

Therefore, irrespective of whether a lifecycle is the correct tool to use or not, a one-size fits all approach is clearly indefensible and not fit for the purpose of managing a member’s risks to their financial assets through their different life stages. Before deciding whether lifecycle funds are a valid alternative to  manage the various risks a member face, it is worth looking at the different types of lifecycle funds as it might not be as straight forward as a simple yes or no.


The Productivity Commissions’ assertions regarding opportunity cost relate to first generation (traditional) lifecycle funds and is constructed on the premise that investment risk levels commence at standard levels of Balanced funds and decline with age to reach a minimum around retirement age as well as the assumption that age is the only factor used to vary investment strategy. However, there are various other forms of life-cycle funds and these have been well covered in the media over the years, an example of which is Mercer’s report on MySuper Market Trends[4].

The utopia of lifecycle funds and ideal state, which only a handful of funds are embarking on delivering across the globe, is a dynamic individualisation approach. These funds are recognising that there are many factors that influence a member’s retirement outcome and consequently their underlying investment strategy. A dynamic individualisation approach provides funds with the ability to operationalise their default (MySuper product) in a progressive way to take into account factors other than age, such as account balance, gender and investment markets.

As members face a range of different risks to their financial assets throughout their lifetime, which also change over time, so too should strategy and this is what dynamic individualisation aims to deliver.   


If Trustees have the conviction that investment risk will always be rewarded, then lifecycle funds should not be adopted. Taking this a step further, instead of adopting a 70/30 balanced fund, the challenge would be to invest in a 100/0 growth fund, as the balanced fund would also result in foregone “opportunity costs”. However, guaranteed returns from taking on investment risk do not exist, and this is why the comparison tends to be made against a 70/30 balanced fund as the industry clearly recognises that investment risk is not always rewarded. 

Regrettably, the Productivity Commission also stated in its draft report that: “The irony of the system is that, if anything, products are most complex during accumulation and most simple in retirement — when the converse constellation is needed for most members.”  

However, the heterogeneity amongst members during accumulation as well as retirement would suggest that a one-size fits all approach is indefensible irrespective of whether it is accumulation or retirement. Most superannuation funds sit on rich data sets of member data, which should be used to make better informed decisions and improve strategy setting for members.

“Heterogeneity amongst members demands individualisation when developing default DC strategies.”

Lifecycle funds enable the efficient taking of investment risk when it is most desirable to do so. The funds who have adopted dynamic individualised lifecycles recognise this and have actually been assigning members to a 100/0 growth strategy where it is appropriate to do so for those members who can afford to be exposed to full investment risk in a specific life stage. Lifecycle funds should thus be seen as a risk management tool and not a risk reduction opportunity cost, if designed correctly. 

In conclusion, generalised statements such as all lifecycle funds are poor value for money is very naïve. Clearly, a poor lifecycle design should be challenged, but it needs to be assessed against the correct objective. Risks change as members age and accumulate more wealth, which are the factors some superannuation funds are using in their lifecycle MySuper products. A ‘lifecycle’ investment strategy approach allows the trustees to differentiate investment risk levels in this way and empowers the Trustees.  Choice members are more engaged and can manually adapt on an ongoing basis. Doing the right thing for members should come first, based on sound principles. Comparability should be a secondary consideration. Making the generalised statement that all lifecycle funds are an opportunity cost with little value is incorrect. Without the flexibility of the lifecycle exemption in the MySuper legislation and the associated prescribed factors, superannuation funds would not be able to continue personalising investment strategies for its default members to better manage members’ idiosyncratic risks.

The Productivity Commission has invited written submissions in response to the draft report by Friday 13 July 2018.

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