The next wave of member-directed investments available through big super funds is likely to include bundled model portfolio-style options and even tailored annuity-style retirement products. The aim is to provide maximum choice and member control of underlying assets through the full range of super fund offerings.

FNZ, which has provided the member-directed platform for several big funds, including AustralianSuper, is hosting a roadshow for funds and other institutions early next month, to discuss various challenges and solutions for retirement incomes strategies.

Super funds have been looking to provide the type of choice available to the SMSF market under their own trustee umbrella as a way to stem the flow of high-balance members who are still constructing their own funds at a considerable pace. According to Australian Taxation Office data, industry and other big funds  – including commercial super funds – have been losing up to A$16 billion a year to the SMSF market for at least the past three years.

Steve Berichon, a consultant to FNZ, says that model portfolios, constructed by managers, would provide separately managed account facilities for those members who want the control of an SMSF but also want the comfort of a professional’s investment selection.

For retirement products, the solution is a little more complex because it usually entails some form of insurance to cover longevity risk.

Damian Millin, head of product at FNZ, said there was an increasing focus in Australia on retirement income solutions, following a trend in the UK and elsewhere, where FNZ has been involved with some big life offices and other institutions.

Funds are looking to replicate some aspects of annuities, such as the guaranteed income, but at a lower cost and with greater flexibility for individual members.

Millin says: “There are many different theories on how to best provide income in retirement and a growing number of specialist techniques in how to deliver it. What is common to them is the idea of investor individualization… There’s a growing realization that retirement income solutions fundamentally challenge the way investments are currently held and administered.”

Outcome-orientated investment strategies, which have accelerated because of investor disappointment since the global financial crisis, usually involve a range of new investment techniques such as the use of ‘smart beta’ products coupled with various alpha-generating techniques.

FNZ says the three main approaches currently adopted for the retirement income market are life company annuities, capital and income-protected products and management overlays. Each has limitations.

For instance, life company annuities provide a low level of control for the investor, not much flexibility and the security lies with the provider’s assets. Capital and income-protected products allow higher investor control and asset security but have no direct link to longevity. Similarly, management overlays have no link to longevity.

FNZ believes future products will consist of several features:

• individual non-unitised asset pools selected to match investor profiles
• a combination of strategies to mitigate the impact of markets, such as dynamic hedging and volatility targeting
• a third-party provided deferred annuity or an internally designed do-it-yourself version.