Fast forward a number of years and the superannuation industry and market environment look very different, and so should our thinking about providing Australians with adequate retirement income solutions.
There is definitely no silver bullet for this issue. Some in the industry have suggested implementing lifecycle funds is the best way to move forward. I'd say that is a step towards recognising some of the investment challenges members face, but it's not good enough.
There are now more sophisticated mechanisms for approaching this challenge, particularly for those in post-retirement. For these members, we should look beyond traditional lifecycle funds and put aside the argument that developing robust post-retirement solutions is all just too hard. We believe that following a systematic approach, but building in flexibility for the future, offers the best prospect of developing effective post-retirement solutions.
The first step in this approach is to recognise that management of retirement adequacy is not a homogenous problem. Each individual has their own goals and objectives and is operating under a different set of circumstances - spending needs, account balance, risk tolerance, the list goes on. So this requires a tailored approach for a large number of individuals. Therefore we believe mass customisation is the minimum standard of asset allocation advice that funds should deliver and retirees should demand. While many continue to put up the argument that this is too hard and inefficient to implement, we'd argue it can be implemented effectively and efficiently.
Getting the investment approach right for each individual, early in retirement, is crucially important to meeting their long-term income needs. The industry needs to evolve beyond the current static mix of assets and aim for an individual investment solution. The solution should include an asset allocation component that can take into account mid-course corrections and adapt to individual needs and changing circumstances.
Within our own client solutions, the Russell Adaptive Investing (RAI) methodology is one example and can be thought of as a 'second generation lifecycle approach'. The RAI methodology is designed to give members an optimal asset allocation that adapts to market impacts and each member's changing needs and circumstances, delivering a personal portfolio on a scalable basis.
Funds also need to think differently about managing longevity risk. While deferred annuities provide a solution, they do so at a significant cost while locking up members' capital. We know that members do not want to be locked in when in retirement; therefore, consideration should be given to a strategy that defers the annuity purchase decision - so annuity deferral, not deferred annuities.
Central to developing effective post-retirement solutions is the recognition that member needs are key. Understanding these needs should be achieved through member engagement started before retirement and continued through every stage. Solutions should aim to make members' experience easier, not more complex. The communication and delivery of a solution is also fundamental to the success of any retirement solution. The best solution in the world will be left on the shelf if members can't easily understand the benefits and how it works.
There's no doubt that providing the right post-retirement solutions is complex. We need to adopt a more systematic approach, focused on the challenges specific to post-retirement to best tackle the needs of tomorrow's retirees.
Chris Corneil is the Australasian CEO of Russell Investments
