Engaging people with their superannuation is the holy grail for the wealth management industry. It’s encouraging to see the work super funds are doing to increase engagement but it’s a slow process. The road to that holy grail is paved with challenges, not least of all the intangibility of retirement, particularly for younger customers.
We believe lifecycle funds and MySuper can play a role in achieving greater customer engagement with superannuation.
Lifecycle funds are not only about returns
Lifecycle funds, otherwise known as target-date or age-based funds, invest in a predetermined way depending on the age of the customer. The asset allocation shifts as the time horizon changes and the customer moves towards retirement.
With lifecycle funds, performance is not the sole aim. The primary focus is the final outcome: delivering a suitable level of income at retirement.
One of the advantages of defined benefit funds, once the mainstay of the superannuation industry, was that they gave customers certainty of income at retirement. Today, defined contribution funds are the norm. But the primary measure for success for defined contribution funds is past performance. Being a backward-looking metric, customers don’t have a future figure they can plan around.
Another prevalent measure of success is performance in relative terms i.e. against a peer group or a benchmark. This can provide fiduciaries with important information about the success of manager selection or the management of business risk. However, it provides no information to the customer about their path to a comfortable retirement. What does it mean to a customer if a fund is a ‘second-quartile performer’? It tells the customer nothing about whether their retirement strategy is on track. And this is partly why engagement is so low.
As an industry, we’re blinkered by performance figures, and it’s critical that a fund performs well. However, it’s just as important to look forward and consider whether a fund will deliver a suitable level of income at the end of a working life. Customers are more likely to be engaged with a fund that focuses on a tangible retirement outcome. A lifecycle fund creates a strong platform for customer engagement, including as part of a MySuper solution.
Lifecycle funds aim to manage the competing objectives of maximising return while minimising sequencing risk. This is best expressed through the metaphor of crossing a river. While a river may, on average, be four feet deep, a quarter of the people crossing the river risk drowning because there are pockets in the river that are seven or eight feet deep. The average depth of the river is irrelevant. Our intention is to get as many people as possible across the river without drowning.
We manage our lifecycle funds actively. The fund manager looking after each age-based cohort aims to optimise customers’ income in retirement and increase the certainty of achieving that outcome. In the early years, it’s about maximising return. As members mature, certainty of outcome becomes more important, while rejecting the temptation to de-risk too quickly. It’s made us think about things in new and different ways.
Take customers on the journey
Communication is critical in reaching that holy grail. We need to focus on whether the fund is on track to meet its objective. This might also serve to dissipate investor concerns about short-term volatility as it reminds customers that superannuation is a long-term investment.
MySuper communications now look and feel different to what people are used to. The reports reflect how each age-based cohort is managed and focus on an expected income in retirement rather than a lump sum dollar value. This will help build engagement (although there is nothing stopping a balanced fund from using a similar form of customised communication).
Of course, lifecycle funds aren’t the panacea for engagement and the issues the industry faces. We need to ensure people do not think lifecycle funds give some sort of guarantee. As with all forms of investing, lifecycle funds remain at the mercy of market risk. The challenge is to talk about this risk openly. Customers need to know about the action they can take to help meet their goals in retirement, such as increasing their contributions or planning to work longer.
The hope is that this will lead to customers participating more actively in their super, such as moving out of default choices. The more people are interested in their retirement, the better.
Sean Henaghan is AMP Capital’s Multi-Asset Group Chief Investment Officer.