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Most default options offered by superannuation funds1 recall Henry Ford’s words that “Any customer can have a car painted any colour that he wants so long as it is black.”
It’s estimated that around 80% of Australians with superannuation accounts have their money invested in a default option.2
Last year’s Productivity Commission’s study of the efficiency and competitiveness of the superannuation system revealed that around 70% of super funds have just a single default. That is, irrespective of age, account balance or gender, all members in these super funds were placed in a one-size fits all investment option.
The report also found that around another 30% of super funds consider just one factor, usually age, in designing their defaults. These funds, might, for example, have a default for members aged under 50 and another for those over 50. Not quite one-size fits all, but close.
QSuper’s eight-group Lifetime default series, stands apart from all others. Lifetime is unique in Australian superannuation as it takes two factors into consideration — age and the member’s Lifetime account balance.
Age: Age is a reasonable proxy for time to retirement and risk tolerance.
As members get closer to retirement they naturally become more risk averse.
Lifecycle investments, such as Lifetime, gradually reduce investment risk as members age to provide more certainty and stability in their retirement benefit.
Account balance: Not all members accrue savings equally. Some have lower salaries, or make additional contributions, or may have had breaks, for instance.
Members with more savings, have more assets “at risk”, but they also have more ability to protect against these risks.
Investment risks impact higher balances more, which is why Lifetime automatically allocates more return-protecting assets to members with higher balances.
Lifetime automatically responds to members’ changing circumstances.
Twice a year (May and November), QSuper reassesses members’ age and account balance, and if things have changed, move members into another group.
Younger members are placed in a Lifetime option emphasising return-seeking investments. As members move closer to retirement, they are gradually moved into Lifetime investment options that increasingly emphasise protecting the gains accumulated over many years.
Overlaying account balance considerations means that the move towards more defensive assets happens at a later age for those with smaller balances. This reflects the lower downside risk they face in the instance of a share market correction, compared to the upside potential of higher returns providing more financial independence in retirement.
QSuper’s unique risk-balanced investment approach means that the Lifetime series is not a one-trick pony over-dependent on strong share markets to deliver against its return objectives.
All eight Lifetime stages feature sizeable exposure to unlisted infrastructure, private equity (investments in privately owned businesses not listed on share markets) and real estate, as well as long dated government bonds, which tend to do well when shares underperform, and underperform when shares do well.
In other words, the Lifetime default series has multiple sources of risk and return potential. That’s risk-balanced investing in action.
The majority of QSuper’s near 580,000 members are invested in Lifetime - some automatically because they haven’t made an active investment choice, and many because they have made a calculated decision to trust QSuper with their retirement outcomes.
1. Default options are the investment options in which the super funds of members, who don’t make an investment choice, are placed.
2. Choosing an investment option (Investment choice). SuperGuide. https://www.superguide.com.au/superannuation-topics/investment-options. Accessed 27 June 2019.
3. Superannuation: Assessing Efficiency and Competitiveness – Inquiry report. No. 91, 21 December 2018. Australian Government. Productivity Commission. https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report. Accessed 27 June 2019.
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