Lifecycle strategies that aim to provide downside protection are more cost effective and less cumbersome than those that offer an absolute guarantee, according to a report by actuarial and consultancy firm Milliman.
"The long-term nature of retirement combined with the fiduciary responsibilities of fund trustees complicates the development of many traditional guaranteed solutions," the report said.
"In addition to the costs associated with guarantees, they are generally difficult for funds to provide without a counterparty, given that many do not have the balance sheet or licensing required to support them."
Although it is possible for a fund to attract a third party to act as a counterparty, this would create a new set of risks, including reputational risk.
For the report, Milliman tested a number of lifecycle strategies, including target date, insurance, constant proportion portfolio insurance and dynamic replication, in a series of hypothetical situations over a five-year period to determine which strategies provided the most benefits.
Although protection strategies scored better on costs and capital management, the outcomes also varied greatly between different funds.
"The specifics for each fund will depend on things such as their investment philosophy - appetite for alternatives et cetera - and scale - smaller players are more likely to outsource," Milliman financial risk management practice leader Wade Matterson, who co-wrote the report, said.
The results were also likely to differ from member to member, but strategies could be adjusted for that, Matterson said.
"It's important to note that the need for protection will vary with the size of the superannuation pot, with those having more money more likely to benefit," he said.
"I see this potentially fitting within a target date-style approach, which would be able to apply to a specific segment of a superannuation fund."
The interest in lifecycle strategies has increased after the global financial crisis showed that traditional defined contribution plans are vulnerable to sustained market downturns, especially for those members close to or in retirement.
Milliman said it expected that as more fund members moved into retirement, funds would increasingly adopt sophisticated investment strategies, including lifecycle options.
