What are lifecycle super funds, and how do they perform?

Close to 70% of Australians with super in one of the major funds are invested in their fund’s MySuper option, the default option for employees who don’t wish to choose another super fund. Around 40% (27) of the 69 MySuper products registered with the Australian Prudential Regulation Authority (APRA) in 2022 were lifecycle products.

If you are a member of a retail fund MySuper default, this is most likely a lifecycle product designed to reduce your exposure to higher-risk growth assets as you age. A small number of industry funds also use a lifecycle design, including Aware Super and Australian Retirement Trust (ART), but most use their traditional balanced or growth option as their MySuper default.

This makes it difficult to compare MySuper returns. Balanced or growth default options have a single strategy for all members with somewhere between 60% and 80% of members’ money in growth assets such as shares with the remainder in defensive assets such as cash and bonds. By comparison, lifecycle defaults might hold less than 40% or as much as 95% in growth assets, depending on your age.

Why lifecycle funds?

Lifecycle super funds, sometimes called lifestage or target date funds, have been around since the early 1990s. While popular overseas, they didn’t really catch on in Australia until after the global financial crisis of 2007–09, which heightened investors’ awareness of market risk. Their position was further cemented with the introduction of MySuper in 2014, when many retail funds adopted a lifecycle approach as their MySuper default.

Lifecycle funds are based on the idea that investors in different age groups should not have the same mix (or allocation) of assets in their investment portfolio. While younger members can afford to take more risks and hold a high level of growth assets, it’s generally held that older members should take a more defensive approach as they get close to retirement.

They are also an acknowledgement that most super fund members are not actively engaged with their super and don’t know how it is invested. With this in mind, lifecycle products automatically increase the amount of defensive assets relative to growth assets as you age and your investment horizon draws nearer.

Automatic adjustments to your asset mix not only help reduce your exposure to market risk in the lead-up to retirement, or sequencing risk, but it also reduces the temptation to tinker with your investments in reaction to adverse market movements. 

The evolution of lifecycle funds

The first generation of lifecycle funds was based on the assumption that members would access most, if not all, of their savings at retirement and could afford very little risk in the years leading up to that point. While most had young members starting off with 85% to 95% growth assets, de-risking started too early, mostly between age 40 and 45 and some even earlier. 

Chant West research manager Mano Mohankumar says it was common for the growth:defensive asset mix to reduce to 50:50 as early as age 50 and 30:70 by age 65. This was despite the fact members can have 20 or more years’ life expectancy after they retire and would benefit from a meaningful allocation to growth assets to help preserve the value of their nest egg.

Mohankumar says another shortcoming of early lifecycle funds was abrupt changes in asset allocation, reducing growth assets by as much as 20% on a given day every five to 10 years. This resulted in arbitrary timing risks that impacted some members but not others, especially in the period leading up to retirement.

The latest lifestyle funds offer a variety of approaches, but a common thread is that de-risking begins later, generally after age 50. 

As Mohankumar points out, member account balances are driven by contributions until around age 45. It’s only after age 50 when balances are higher that investment returns become the dominant factor. So it is counterproductive to de-risk too early and limit members’ ability to grow their super balance.

Mohankumar says nowadays growth asset allocations average about 75% at age 55, 65% at age 60 and 53% at age 65. However, analysis by SuperGuide of a sample of 24 lifecycle funds found a wide dispersion of growth asset allocations.

As the graph below illustrates, from age 34 to 50, growth asset allocations hold steady in a range of 73% to 95%, a difference of 22%. De-risking is generally underway by age 55 when growth assets range from 56% to 88% and the difference blows out to 32%. By age 60 the range of growth assets is 53% to 75% while at 65 it is 42% to 70%. Some funds maintain growth assets at 70% from age 65 to age 80!

Source: SuperGuide, based on an original discussion on Reddit  

You will also notice from the graph above that there are big differences in the ‘glidepath’ taken by different lifecycle funds.

A glidepath is simply the way lifecycle funds change their asset mix over time. Some reduce growth assets (de-risk) incrementally each year from a certain age, giving a smooth glidepath to retirement. Others take a stepped approach, de-risking by a larger amount at set intervals of five years or so. 

Lifecycle fund case studies

Lifecycle funds employ such a variety of approaches these days, a few examples will help illustrate some important differences. These are example only and should not be taken as recommendations.

Vanguard. Vanguard introduced its Super Lifecycle default MySuper fund in October 2022. As with all Vanguard funds, it uses passive, index-based portfolios. The asset allocation within these investment portfolios is 90% growth assets and 10% defensive assets until age 48. From age 48 to 82 growth assets are reduced incrementally each year. From age 82 growth assets remain at 60%.

Australian Retirement Trust (ART, from the merger of Sunsuper and QSuper). ART’s Lifecycle Investment Strategy MySuper default uses three underlying building block portfolios. To age 55 members are invested in the fund’s balanced portfolio. From age 55 to 64 there is a gradual transition to the retirement pool and cash pool (cash and term deposits). For example, when you turn 59, 50% of your super contributions go into the balanced portfolio, 45% to the retirement pool and 5% to the cash pool. From age 65 members are 100% invested in the retirement and cash pools.

Russell Investments. Russell’s GoalTracker MySuper default initially uses your age and account balance to determine your asset mix. It then further personalises your investment by asking a set of questions, allowing you to set retirement income goals and track your progress. Growth assets are set at 95% to age 50 then automatically decrease by 2.5% per year from a range of 82.5% to 95.5% between the ages of 51 and 55, and 70% to 80% from age 56 to 60. From age 60 growth assets are 70%.

Mercer. Mercer’s SmartPath puts members into five-year cohorts. It has one core investment portfolio but de-risks each age cohort within that portfolio. For example, members born before 1954 have 60% growth assets, those born 1954–58 have 64% growth assets, 1959–63 73% growth assets and so forth until those born after 1973 (that is, aged under 50) have 88% growth assets.

Comparing lifecycle vs single strategy returns

While it’s difficult to compare the performance of lifecycle and single strategy funds, developments in recent years such as the ATO’s YourSuper comparison tool and APRA’s MySuper heatmaps help fund members do just that. What’s more, members are encouraged to potentially switch funds if their fund underperforms, so there’s a lot at stake.

With that in mind, research by SuperRatings attempted to ‘compare the pair’ by taking into account both return over a typical member’s lifetime and the relative risk position at or near retirement.

To do this it calculated an ‘Equivalent Lifetime Return’ (ELTR) for MySuper products:  

• For a single strategy option, the ELTR was the annualised return over five years to June 2022.
• For a lifecycle strategy, the ELTR was the annualised return over a member’s lifetime from age 20 to 67, using each lifecycle stage option’s returns over the selected period, applied to the years during which the member would be invested in each lifecycle stage. Only products with at least five years of historical performance were included.

To evaluate the portfolio risk of an investment option at retirement, the study used the Standard Risk Measure that would apply to a member at age 67, which can be found on each fund’s product dashboard. 

In a sample of 45 products, including 15 lifecycle products, the following table lists the top 10 performers as at 30 June 2022.

Rank	Fund name	Structure	ELTR	Risk at retirement
1	Qantas Super	Lifecycle	7.94%	Medium to high
2	Hostplus	Single strategy	7.76%	Medium to high
3	Aware Super	Lifecycle	7.45%	Medium
4	AustralianSuper	Single strategy	7.28%	High
5	HESTA	Single strategy	6.75%	High
6	Vision Super	Single strategy	6.71%	High
7	UniSuper	Single strategy	6.65%	High
8	Lutheran Super	Single strategy	6.60%	Medium to high
9	Cbus	Single strategy	6.55%	Medium to high
10	VicSuper	Single strategy	6.46%	High

Source: SuperRatings

As you might expect, single strategy MySuper options with high or medium-to-high risk dominate the list of top performers over the long run, although there are more of them. However, a lifecycle fund topped the list and the only other lifecycle fund to make the top 10, Aware Super was the only product able to put retiring members into a medium risk position at 67.

As lifecycle products are designed to reduce risk and allow members to sleep at night as they approach retirement, SuperRatings suggests being in the top 10 may not be the top priority. Instead, outperforming the median return might be a more realistic and consistent goal.

The median ELTR in the sample set of 45 funds was 5.92% per year. The study found 60% of lifecycle products outperformed the median while 47% of single strategy products exceeded this benchmark.

The upshot is that lifecycle products can and do achieve above median performance measured over a member’s lifetime while reducing risk close to retirement. However, to find a lifecycle fund that meets your personal performance and risk objectives, you need to know what to look for.

Lifecycle funds: What to look for

If you are a member of a lifecycle fund, or  looking for an appropriate investment option, here are some things to keep in mind:

1. Your investment horizon matters.
2. Adopting a significant allocation to growth assets can be a rewarding strategy, even when you are in your 60s and approaching retirement.
3. Don’t automatically assume the best strategy leading up to and after retirement is the traditional approach of boosting your allocation to defensive assets and reducing your exposure to growth assets.
4. Younger super members usually have a better outcome when they choose a higher allocation to growth assets, as risk is spread over a longer investment horizon. Even if you experience a significant market fall, the underperformance of your investments will not be significant in the long run.
5. Once de-risking begins, a smooth reduction in growth assets reduces timing risks.
6. There is no ‘correct’ asset mix. Different people require a different mix of growth and defensive assets depending on their investment horizon, account balance and tolerance for risk.