Superannuation funds need to get on the front foot and respond to the strategic challenge of developing good retirement solutions now, says global implementation specialist manager Parametric CIO Paul Bouchey.
“Although superannuation funds can follow the Government’s legislative timetable to develop a Comprehensive Income Product for Retirement (CIPR) by 1 July 2022, that’s hardly an optimal outcome for fund members who have retired or are making retirement plans now. They want a timetable dictated by their needs – not Government legislation.
“It will require superannuation funds to ‘get over’ the powerful anchoring bias of an accumulation mindset to design good solutions for retired members and members in retirement-planning phase.”
These comments are echoed by Parametric’s Australian Managing Director of Research, Raewyn Williams, who say superannuation funds should not view developing a CIPR as a chore, but as an opportunity to innovate free of the constraints from benchmarking and peer sensitivity that plague accumulation portfolio design.
“Superannuation funds should appreciate that CIPR represents a license for fresh thinking about how to build investment portfolios that map to members’ needs and objectives, which are quite distinct in retirement. Fundamental matters like portfolio objectives, liquidity and how risk is defined are back on the table. It’s an exciting time, actually.”
Bouchey and Williams say although there is keen debate about the use of annuities (or other innovative longevity risk pooling solutions) in a CIPR, superannuation funds should not be distracted from thinking about clever ways their CIPR or other retirement solution can achieve their equity exposure.
Says Bouchey: “Certainly, it’s clear that the investments backing a CIPR will need to have some exposure to equities or other growth assets. Superannuation funds should be looking now for different approaches, such as specific defensive or low volatility strategies and factor-based strategies that use simple construction rules to produce better-than-market income and volatility outcomes.”
“Other equity options include emerging markets strategies with good downside risk properties and Australian equity strategies that recognise the value of franking credits to retirees as an additional source of yield while addressing the risks of simplistic franking-tilted approaches.”
Williams adds: “Structurally, superannuation funds should also think about whether segregating their pension assets from their accumulation assets – at least for some asset classes – makes sense.”
“We published research earlier this year that suggests this decision should be guided by whether a super fund adopts a ‘mass production’ versus ‘mass customisation’ mindset for its retirement solution design.”
Bouchey says many superannuation funds are starting to commit to “fewer, deeper investment partnerships”, which is a good fit for the client-first, research-driven, collaborative approach Parametric uses as a specialist implementation manager. Bouchey believes CIPR design offers a great opportunity for funds to act on this “deep partnership” principle by finding the right retirement solution investment partner.
“All these retirement portfolio construction ideas can be scoped, modelled, adjusted and re-explored collaboratively between a super fund and investment partner if the latter has a clear sense of the fund’s guiding philosophies and the needs of its retired members.”
As Bouchey sees it: “The investment partner’s job is to design and deliver a portfolio solution that fulfils the fund’s retirement design vision, and continue to collaborate with the fund to evolve this vision and its implementation through time. It’s a continuous journey. But that journey should start now.”
For more information or to obtain a copies of Parametric research papers please contact:
Simrita Virk at Shed Connect
Parametric Portfolio Associates® LLC (Parametric), headquartered in the U. S. in Seattle, Wash., with Australian offices at L25, 259 George St, Sydney NSW 2000, is registered as an investment adviser under the U. S. Securities and Exchange Commission Investment Advisers Act of 1940. Parametric is exempt from the requirement to hold an Australian financial services license under the Australian Corporations Act 2001 (Cth) (Corporations Act) in respect of the provision of financial services to wholesale clients as defined in the Corporations Act and pursuant to the Australian Securities and Investments Commission’s (ASIC) Class Order 03/1100 and ASIC Corporations (Repeal and Transitional) Instrument 2016/396. SEC rules and regulations may differ from Australian law. Parametric is not a licensed tax agent or adviser and does not provide tax advice in Australia or any other country. This material is intended for wholesale use only and is not intended for distribution to, nor should it be relied upon, by retail clients. With over $245 billion USD of assets under management as at 30 June 2019, Parametric is a global asset management firm offering investors a variety of portfolio solutions, including tax-managed centralised portfolio management, tax-managed indexing and factor investing strategies, as well as emerging markets and defensive equities strategies. Parametric Australia is a division of Parametric Portfolio Associates® LLC that is a majority-owned subsidiary of Eaton Vance Corp, one of the world’s most dynamic global asset management companies.
For more information please visit website: www.parametricportfolio.com.au