08.03.10 - Review of our default investment option

Author: AustralianSuper

As Australia’s largest industry super fund, we are responsible for managing the retirement savings of over 1.4 million members. So, to make sure that we are doing all we can to provide higher retirement incomes for you, we continually review our products and make improvements where they may be needed.

Last year we reviewed our default investment option, in order to understand whether it was the right default option for our members, and to identify any changes we may have needed to make.

In our review we compared our existing default option with a range of other options, including investment options that change over time according to a member’s age.

We conducted detailed analysis and modelling to understand how much risk and potential return was provided by each option, and we considered all the qualitative and quantitative factors relevant to the decision. These factors included:

• The length of time a member’s superannuation money remains invested over their life
• The relationship between a member’s superannuation savings and their Age pension payments
• The increasing longevity of Australians
• The ‘smoothing’ effect of long investment periods on short-term peaks and troughs in investment returns
• The degree to which members can tolerate any short-term peaks and troughs in investment returns; and
• Historical returns from investment markets.

What did we learn?

Our main conclusions from the review were that:

1. Investing for a retirement income is different to investing for a lump sum
   Super exists to provide retirement income. The timeframe of your super investment is longer than any other investment you are likely to make - from the start of employment to retirement and beyond. As an investment it does not stop at retirement age. So, it’s important to invest with the goal of providing the highest possible retirement income for the longest possible time, not just a lump sum for retirement.
   
2. More aggressive options can be suitable after retirement age as well
   Many people invest more conservatively as they get older, looking to protect their investment as they approach retirement. It is worth remember, however, that while more aggressive options can from time to time provide negative returns, over longer investment periods they have provided the highest long-term returns. Your investment doesn’t cease the day you retire, it continues to provide you with a retirement income for as long as possible. Most Australians can look forward to a 20-30 year retirement, which is a very long time, and enough time to smooth out the effects of any short-term peaks and troughs in investment returns.
   
3. More conservative investments are suitable in the second half of retirement
   As members get older their investment timeframes obviously become shorter, and they are also gradually depleting their savings as they draw regular income from them. We concluded that it is appropriate at this point for a default option to reduce the risk of any short-term peaks and troughs in investment returns, as there may not be sufficient time for a member to make up any losses they may experience.

What does this mean for you?

Super members

Having completed this review, we’ve decided to keep the Balanced option as the default option for our super members. So there’ll be no change to the current arrangements and the Balanced option will remain the default investment option for members who don’t make any investment choice for their super account.

The Balanced option aims to meet its performance objectives over the medium to long-term period of more than five years, and we made this decision on the basis of the average member’s long investment horizon.

Find out more about the Balanced option.

Pension members

For our pension members who haven’t made an investment choice we’ll introduce a simple age-based default arrangement. The default option will be the Balanced option until the member reaches the age of 75. At age 75 any Pension member who has not made an investment choice will be switched from the Balanced option to the Conservative Balanced option.

This change takes into account the long time investment horizon that most members starting a pension account have, particularly given ever-increasing longevities. As with superannuation members, the Balanced option caters to this long horizon. The Conservative Balanced option was seen as a more appropriate default offering for members who are approximately half-way through their retirement, as their investment horizon is shorter and they have a shorter period in which to smooth out any short-term peaks and troughs they may experience in investment returns.

Find out more about the Conservative Balanced option

What does this mean for you?

As we have said there won’t be a change for super members. For Pension members, the age-based default will commence on 1 July 2010. From then, AustralianSuper Pension members who haven’t made an investment choice will receive a reminder, just before they turn 75, to give them the opportunity to make an investment choice. If they don’t make an investment choice, their account will be switched into the Conservative Balanced option.