(pictured: Ron Bird)
Target-date funds, which proved popular in the US in recent years and are still being promoted in Australia, with mixed success, were roundly criticised by academics and some funds management practitioners at last week’s workshop organized by the Paul Woolley Centre at the University of Technology, Sydney.
Professor Ron Bird, the former fund manager who is the convenor of the Paul Woolley Centre, a research group, said that the general finding of the work done at UTS was that target-date funds were “not a good idea”.
“That should not be surprising,” he told the workshop. “But we also found some things that we weren’t intending to look at. For instance, by our calculations the general welfare of society will increase if people are allowed to use their super to buy a house.”
With target-date funds, asset allocation is automatically adjusted according to a person’s age, in their most simplistic form, such as in the strategies for a lot of MySuper products. This just meant “time diversification”, Bird said.
Legal & General Australia, the life office acquired by Colonial in the 1990s, developed a target-date fund in about 1992, Bird said. It was a failure.
More importantly, members’ other assets, such as a home, can make a significant difference to their retirement.
Bird noted that the funds management industry had generally been critical of the suggestion, made from time to time, that super should be allowed to be used to contribute to one’s owner-occupied home. But, in terms of an investment, the average capital gain of 5.5 per cent a year – over the past 30 years – from residential property in Sydney and Melbourne would have to fall to 2.5 per cent for the investment to be a bad idea.
The number of people who would be able to buy house would increase from the 50th percentile (half of the population) up to the 63rd percentile (two-thirds of the population) if they were allowed to use their super.
Bird said that, for low-income people, super was not the salvation that the industry often said. The age pension was their salvation. For the top one-third of income earners, neither the age pension nor target-date funds mattered. Of the middle one-third of income earners, about 40-45 per cent would draw a pension which would provide, on average, 20 per cent of their post-retirement income. Obviously, all of the bottom one-third would draw a pension.
“Target-date funds may have intuitive appeal but they do not seem to achieve any worthwhile purpose, especially in the presence of a safety net such as the age pension” he said. “Retirement incomes policy should not be considered in isolation but, rather, in a whole-of life context.”
Bird argued that the tax subsidies associated with mandatory super had been a waste. It it’s mandatory, why do you need to subsidise it?
“Using you super balance towards a first mortgage would be very positive for people’s welfare,” he said. “For many it’s the only access to gearing they can get. Not having to pay rent in retirement is its outworking.”