(pictured: Craig McCulloch)
The challenge of providing retirement products increasingly plagues big super funds, especially as a lot of their near-retirement high-balance members weigh up the SMSF alternative. Big funds have many advantages they may not be exploiting, such as ‘longevity pooling’ strategies.
Milliman, the global actuarial advice firm which specialises in retirement and risk strategies, held a seminar in Sydney last week and will hold another in Melbourne tomorrow (Tuesday) analysing the various ways funds can approach the building of retirement products.
Longevity pooling, which is how insurance companies operate, is arguably the most efficient way to provide for that component in a retirement investment strategy. It requires a large number of members, which super funds have in abundance, such that those who die earlier effectively subsidise those who die later.
Mercer launched a longevity-pooling product for its super fund clients in 2014, to much acclaim, and Milliman has also launched an offering: the Milliman Retirement Enhancement Trust (RET).
Milliman recently recruited a former super fund executive, Kevin Moloney, to open a Melbourne office, reporting to Wade Matterson, principal and senior consultant. Moloney has previously held senior roles at Telstra Super and Queensland’s Energy Super.
Investing in retirement is very different from investing for retirement. Craig McCulloch, senior consultant at Milliman, said that a one-size-fits-all approach would not work in retirement and required some level of advice to be given to the client. However, “smarter defaults” and a form of “mass customisation”, which could fit different groups, were important.
In retirement there is limited opportunity for recovery from market downturns. Retirees have varying consumption patterns and require flexibility around issues such as bequests and liquidity. The age pension also has a major impact on most retirees.
Milliman estimates, in fact, that for a low-super balance retiree (with, say, about $100,000 in super) the age pension is worth about $500,000. It’s a government-guaranteed, inflation-adjusted annuity stream.
Michael Armitage, Milliman head of fund advisory services, said the three main inbvestment risks in retirement were volatility, the sequence of returns (where losses in early retirement had major ramifications) and inflation risk.
He said the traditional approach to retirement products looked too much like accumulation-style strategies, with an over-reliance on diversification. Exposures to growth need to be married with risk management. Milliman uses futures rather than options for protection, which the firm believes saves about 50bps a year.
“We are trying to re-shape the distribution of returns,” he said, “with a truncated tail risk – although you pay for that by limiting your upside… The aim is lower volatility, capital protection and the ability to participate in growth with more certainty of returns.”
Milliman has applied the Milliman Managed Risk Strategy (MMRS) across the Maritime Super fund, including the MySuper option, in an effort to protect investors from violatility and the risk of large drawdowns.
According to Jeff Gebler, a financial risk management consultant, the inflation issue is a complex one because inflation is not consistent across goods and services. For example, technology goods prices have low-to-negative inflation while health care costs have high inflation.
Using a longevity pooling approach would allow for greater allocations to growth assets, combined with risk management, while explicitly managing the member’s longevity risk.
But Gebler said that experience suggested that for these types of products to become widely accepted they would have to be default options, perhaps with an opt-out choice. “We see this happening at the fund level,” he said.