Life-cycle investments to address retirement risk
The move by governments and corporates to exit the pension business, combined with the first waves of baby boomers reaching retirement, has shifted a higher level of risk to a greater number of people and caused superannuation funds to adopt life-cycle investments.
According to the fifth annual Principal Global Investors CREATE report, these shifts have increased the need for both financial education and understanding of risk for those near retirement age, as well as access to investments which will provide returns up to and after retirement.
The report covers the findings of a global survey of 713 asset managers, pension plans and consultants, fund distributors and administrators from 29 countries.
Principal Global Investors (Australia) chief executive Grant Forster said the shift away from pensions by governments and companies across the globe meant that risk had been shifted “from those who couldn’t manage it to those who don’t understand it”.
“In the past defined benefit funds removed the questions around asset allocation, but as governments and corporates moved out of the space in the 1980s and 1990s they moved those questions to the individual - who probably did not understand the risks,” Forster said.
“If we then consider the global financial crisis and the waves of baby boomers retiring today and living for another 20 years, then the dynamic has changed and we are now faced with different issues than we thought we would face.”
Forster said that locally this has meant that superannuation vehicles have been designed to accumulate assets, with no consideration for distribution of income after retirement. However, the demand for income and yield has resulted in superannuation and investment managers looking towards vehicles focusing on downside risk, such as absolute returns and inflation-plus style investments and lifecycle products in particular.
These latter products, which are already on offer from a number of local industry super funds, are likely to see greater diversity in asset allocation which is matched to life stages during the accumulation phase, and is a recognition that previous approaches only worked during ongoing bull markets.
Forster said this would also result in a shift away from the traditional equity-bond allocation, with a shift to real assets taking place and interest in local and overseas commercial property as well as in debt and equity.
“Real assets indicate that people are once again thinking about inflation risks and moving away from the 70:30 equities-bond mix traditionally used - leading to greater interest in property, infrastructure and commodities as income-producing investments.”
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