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 choose a super fund. If you are a member of a retail fund, this is most likely a lifecycle product which is designed to reduce your exposure to higher risk growth assets as you age.
A small number of not-for-profit funds also use a lifecycle design, but most use their traditional balanced or growth option as their MySuper default.
This makes it difficult to compare MySuper returns. Whereas balanced or growth default options have a single strategy for all members with somewhere between 60% and 76% of members’ money in growth assets such as shares with the remainder in defensive assets such as cash and bonds, lifecycle defaults might hold as little as 40% or as much as 88% in growth assets, depending on your age.
For this reason, Chant West reports returns for lifecycle funds separately (see latest returns at the bottom of this article). Most lifecycle funds are based around age groups; when you join the fund you are assigned to a group based on the decade you were born. While your group stays the same, over time your exposure to growth/risk assets changes. So members born in the 1990s are currently invested in 88% growth assets while Baby Boomers born in the 1940s hold only 40% growth.
You will notice that the table below includes median returns for MySuper Growth (balanced) default products. This is not as a direct comparison but to illustrate how the lifecycle design functions relative to balanced funds with an average weighting of 72% growth assets.
Why lifecycle funds?
Lifecycle funds, also called lifestage or target date funds, have been around since the early 1990s but didn’t really catch on until after the global financial crisis of 2007-09.
Definition: Lifecycle funds are products available in the accumulation phase of super that automatically increase the relative weight of defensive assets (such as cash) versus growth assets (such as shares) as members age.
A criticism often aimed at traditional balanced default funds is that they offer a one-size-fits-all approach to investing. What’s more, they are not necessarily balanced. A reasonable person might assume that ‘balanced’ means a 50/50 split between higher risk growth and lower risk defensive investments, when most balanced MySuper options have a tilt to growth of 60% or more.
The shortcomings of this approach became obvious in the wake of the GFC. People who were invested in their fund’s balanced option and close to retirement lost a substantial chunk of their retirement savings at a time when they had little chance of recouping their losses. Unless of course they were prepared to work well past their planned retirement date, which many of them chose to do.
In response, some super funds launched lifecycle options for people in the accumulation phase of super. The trend accelerated when MySuper was fully introduced in January 2014. From that date, super funds wanting to attract compulsory SG contributions had to decide what form their MySuper offerings would take.
The deliberate de-risking of investment portfolios in the lead-up to retirement is what many financial advisers would recommend to clients. Default lifecycle products mimic this approach for super fund members who don’t have an adviser and who are not actively engaged with their super. While most super funds make it easy for members to switch some or all of their balance from high growth to lower growth options, few people choose to do so.
How do lifecycle funds work?
The rationale for lifecycle funds is that younger people can afford to take on more risk in return for higher long-term rewards because they have time to ride out market ups and downs. As people age and get closer to retirement, capital preservation becomes a higher priority.
The Productivity Commission report on Superannuation released in January 2019 argued that well-designed lifecycle funds can produce retirement benefits equal to, or better than, single-strategy balanced funds while better addressing sequencing risk for members.
Sequencing risk, also called sequence of returns risk, refers to the order of your investment returns. If a young super member suffers a negative 20% annual return early in their working life it has less impact on their final retirement outcome than a similar loss for an older member close to retirement.
The younger member’s regular super contributions will buy more investments at the bottom of the market when prices are cheap, and these investments will have many more years of compounding returns.
If an older super member suffers a negative 20% return just before they retire, when they start to withdraw money from super it will effectively crystallise their losses. They then run the risk of their savings running out sooner than planned.
As at December 2018, a third of MySuper products had a lifecycle strategy, and these accounted for 36% (or $243 billion) of MySuper assets.
What are the limitations, if any?
MySuper lifecycle products have only been around for a little over five years – a period marked by a long bull market in shares and bonds – when the average super member might be accumulating retirement savings for 40 years or more. The test will come when we can compare lifecycle and single-strategy default funds over a full market cycle and preferably longer.
Some of the criticisms of lifecycle funds are that they:
- Fail to take account of their members’ personal characteristics. Determining a member’s asset allocation purely on age alone fails to take into consideration their tolerance for risk and overall financial position. Not everyone wants or needs to significantly reduce risk before retirement. With today’s retirees looking at up to 30 years in retirement, there is an argument for maintaining some exposure to growth assets well into retirement.
- Dial down risk too early. While acknowledging the merits of a lifecycle strategy, the Productivity Commission found that some MySuper lifecycle products shift members into lower risk assets too early in their working lives. In some cases, risk is reduced as early as age 30. An overly cautious approach could leave members with lower retirement balances than they would have otherwise achieved in a fixed-strategy, balanced fund.
Some lifecycle funds have tried to address these limitations by fine-tuning their product design. For example, some retail funds use 5-year age groups rather than 10 so the glide path from high risk youth to low risk pre-retiree is smoother.
Some industry funds with lifecycle products are also using more sophisticated approaches. Chant West gives these examples:
- QSuper takes account of the member’s balance as well as their age, with reviews and potential option switches every six months.
- Sunsuper transfers a small amount out of their default balanced fund into their lower risk retirement and cash options every month after age 55.
- Australian Catholic Super’s default strategy changes the member’s investment mix every year from age 40 to 70.
Lifecycle funds are likely to become even more personalised due to rapid advances in technology. The Productivity Commission argues it is only a matter of time before super funds can personalise their lifecycle strategies by including factors such as age, account balance, contribution rate (taking into account career breaks), gender, expected returns and risk.
In the meantime, lifecycle designs and performance vary significantly.
If you are a member of a lifecycle super fund, or thinking about joining one, it’s important to understand how it invests your savings, how it will alter your asset allocation over the course of your working life, and how its performance compares with similar products. All these things can make a big difference to your retirement balance.
Latest lifecycle super fund returns (to 30 April 2019)
The continued recovery in global sharemarkets after their December fall is reflected in returns for MySuper Lifecycle fund returns for April. The higher the allocation to shares and listed investments, the higher the return.
Median Retail MySuper Lifecycle Cohort Performance (Results to 30 April 2019)
|Decade of birth||Median Growth Assets||1 Mth (%)||3 Mth (%)||FYTD
|Since Jan 2014 (% per year)|
Source: Chant West
For the financial year to date, median returns for younger members born in the 1970s through 1990s (median exposure to growth assets of 87-88%), were ahead of returns for traditional balanced funds (represented here by the MySuper Growth default with median growth assets 72%).
The median return was 5.7% for the 1970s and 1990s age groups and 5.8% for those born in the 1980s, compared with the MySuper Growth return of 5.3%.
Returns for older members with lower risk portfolios were also up by a more subdued 4.1% for those born in the 1940s, 4.2% for the 1950s group and 4.9% for the 1960s group. This should not be read as underperformance, but the price older members pay to preserve their capital.
In the five years since January 2014, during a period of high sharemarket returns, the median return for the youngest members was 8.1% per year compared with 5.3% for the oldest members and 8.2% for the average MySuper Growth funds.
Chant West argues that these returns show lifecycle funds are doing what they are designed for, rewarding high risk investors in periods of high sharemarket growth, while preserving older members’ savings as they near retirement.
Disclaimer: This article is general information only and does not provide any recommendation on investing with lifecycle super funds in general, or any specific super fund. It is important to get independent financial advice when considering what financial products may be suitable for you.