Australian fund, QSuper’s creation of eight different investment cohorts for its 440,000 default fund members this month has sparked curiosity and admiration from defined contribution experts in the US, the UK and New Zealand.
The investment strategies for each group will be focussed on an estimated retirement outcome for that segment, taking into account the median projected retirement income including age pension entitlements, salary and contribution rates and retirement date.
Rosemary Vilgan, chief executive of QSuper, said the rise in contributions from 3 per cent to 9.25 per cent and the impact of the GFC presented an obligation to adapt and that QSuper’s move would pose a challenge for other Australian super funds to change too.
Federal Retirement Thrift Investment Board, Washington D.C. USA
Kim Weaver, director, external affairs for the Federal Retirement Thrift Investment Board, which manages US $358 billion for close to five million Americans, described QSuper’s developments as interesting, not least because the Thrift Savings Plan kept an eye out for ideas used overseas that they could draw upon.
The Thrift Savings Plan offers five lifecycle funds that are custom designed to take the same factors being used by QSuper into account, she said.
“Our L Funds are reviewed annually and updated demographic information is taken into account, along with other market factors. The L Funds’ asset allocation is updated as appropriate.”
Mercer, Leeds, England
In the UK, one of largest advisors of corporate plans is seeing a trend towards multiple lifecycle funds.
Paul Macro, UK DC & savings client leader at Mercer, said he knew of a few plans that offered three lifestyle strategies and following recent budget changes which have ended compulsory annuitisation more would follow.
“There has been lots of talk about having multiple default options and to do this, recognition of the types of members that are in the scheme will be necessary.”
He added: “I suspect many trustees will be nervous of making different assumptions for different people – but that as the experience of member behaviour in the ‘new world’ develops over time, this may change.”
NZ Superfund, Auckland, New Zealand
David Iverson, head of asset allocation at NZ Super saw the move as logical but was worried about the communication challenge.
“Even though the approach is a step in the right direction, it has the potential to not be seen that way,” he said. “In other words, individuals may not know how to articulate an investment plan that matches what they need/want. But they do know how to compare – with cash, with other funds, with other options. While this behaviour already exists, it can become heightened if a provider is doing something different, and may not be well understood.”
Professor Robert Merton, MIT Sloan School of Management, Cambridge, Massachusetts, USA (also resident scientist at Dimensional Fund Advisors Holdings Inc.
“Like Dimensional’s Managed DC, QSuper understands that the goal for superannuation should be providing retirement income and they’ve made a great start on framing it in terms of the needs of the individual member.
“The solution we’ve developed at Dimensional, though, goes further than just two factors in terms of personalisation of the investment process. In addition to age and existing account balance, Dimensional includes other important factors such as current salary, contribution rates, gender and time to retirement.
“Obviously, the system needs a well-designed default strategy to be effective for the majority of people who do not engage with super.”