The CIPR segment needs to think innovatively to help improve product design, said Parametric director of research and after-tax solutions Raewyn Williams.
“This is the industry’s opportunity to position superannuation as a genuine whole-of-life financial solution and not just a pre-retirement savings vehicle, and most super funds should be grabbing this opportunity with both hands," Ms Williams said.
“As funds tackle the challenge of balancing the ‘attack’ and ‘defence’ elements in a true CIPR solution, we believe it will be useful to cast a wide net for potential solutions and compare these solutions against the ‘triangle of needs’ for high income, risk management and flexibility presented in the Financial Systems Inquiry report.
“Solutions which more naturally deliver a balance of all three outcomes are, surely, worthy of further consideration,” she said.
Ms Williams pointed out that designing a CIPR solution that considers all aspects of defence is particularly difficult. She added that "nowhere" in the super industry is "innovation more needed".
Referring to research by Parametric, she indicated that the optimal way of adding defence to a CIPR solution is through a “defensive equity” approach.
“From a CIPR design perspective, this ‘defensive equity’ approach is attractive because it reduces the retiree’s exposure to equity market volatility and downside risk but, instead of introducing a cost to this, finds a healthy replacement source of income for the retiree to the ‘equity risk premium’ the retiree has given up,” Ms Williams said.
“This approach combines partial de-risking with an overlay strategy which positions funds on the sell-side of the equity protection other funds are buying.
“Not only does this avoid the cost (income drag) and flexibility issues with buying CIPR protection, it generates option writing (premium) income and allows the fund to harvest a consistently observed ‘volatility risk premium’ in the market,” said Ms Williams.
