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.

There are currently 64 MySuper products, down from 80 in 2021, and this trend is likely to continue as more mergers are finalised, according to SuperRatings insights manager Joshua Lowen. Around 41% (26) of these 64 MySuper products registered with the Australian Prudential Regulation Authority (APRA) in 2024 have a lifecycle design.

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 but growing 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 and the fund’s design.

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.

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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 accept a higher level of risk and hold more 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 also reduce the temptation to tinker with your investments in reaction to adverse market movements. 

The evolution of lifecycle funds

The first generation of lifecycle funds assumed 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 40 to your early 50s, growth asset allocations hold steady in a range of roughly 76% to 95%, a difference of 19%. 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 62%. Some funds maintain growth assets above 60% 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.

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 default MySuper – Lifecycle 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 47. From age 48 to 82 growth assets are reduced incrementally each year. From age 82 growth assets remain at 40%.

Aware. Aware Super’s FutureSaver MySuper Lifecycle default also uses three core investment options, but with higher levels of growth assets continuing well into retirement. Members aged 55 and under are fully invested in the High Growth option with 88% growth assets. This is gradually dialled down so at age 60, for example, members are 100% invested in the Balanced option with 75% growth assets. From age 65, members are fully invested in the Conservative Balanced option with 57% growth assets.

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 92.5% 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 (age 70 and older) have 60% growth assets, with growth assets gradually increasing to 90% for the 1969–73 cohort (that is, aged under 55).

Top 10 MySuper lifecycle returns (to 30 June 2024)

The table below shows the top performing MySuper lifecycle options for 1 year to 30 June 2024. As super is a long-term investment, the table also provides 10-year average returns for those same funds, where available.

Returns are after investment fees and taxes and are rounded to one decimal place; rankings are determined using unrounded data. Based on MySuper Lifecycle options for a members aged 45 or under tracked by SuperRatings.

As you can see, the top 10 lifecycle default options over the year were for younger members under age 50. This was due to their higher allocation to shares – seven of the top 10 held 90% or more in growth assets – in a year of strong global market returns.

SuperRatings executive director Kirby Rappell says there has been a trend over the last couple of years to lifecycle options increasing their exposure to growth assets such as shares, particularly for members aged under 45.

At the other end of the scale, many funds are also de-risking later – in the case of Aware at age 65-plus – and ending the glidepath at more than 50% growth assets instead of 20–40% previously.

“While this has benefitted members this year, higher exposure to these assets also comes with increased ups and downs.

“We encourage members to learn how their fund’s investment strategy works so they are comfortable with annual and long-term performance outcomes,” he says.

Comparing lifecycle vs single strategy returns

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

With that in mind, research by SuperRatings attempts 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 calculates an ‘Equivalent Lifetime Return’ (ELTR) for MySuper products:  

• For a single strategy option, the ELTR is the annualised return over seven years to June 2023 (the latest data available).
• For a lifecycle strategy, the ELTR is 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. 

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.

The latest research used a sample set of 37 MySuper products due to the relatively small number of funds with a seven-year history.

Top 10 Equivalent Lifetime Return (ELTR) as at 30 June 2023

Results are based on the Equivalent Lifetime Return model using seven year returns for members with a lifetime of age 20 to 67. Growth asset ratio reflects the exposure to growth assets at age 67.

Returns are after investment fees and taxes and are rounded to one decimal place; however, rankings are determined using unrounded data held by SuperRatings. Based on MySuper products tracked by SuperRatings.

As you can see, there are equal numbers of lifecycle and single strategy option in the top 10. This is in marked contrast to the previous year, when only two lifecycle funds made the list. The median ELTR was 7.1%, with eight lifecycle funds and 11 single default funds above the median.

Lowen says the increase in the number of lifecycle funds in the top 10 was driven primarily by the increased level of growth investments in lifecycle options for a significant proportion of a member’s lifetime and the fact that 2023 was a strong year for equities.

“It is likely given the strong performance of lifecycle options over (the 2024 financial year) that we will see similar, if not more lifecycle options in this year’s top 10 results,” says Lowen.

The upshot is that lifecycle products can and do achieve above median performance measured over a member’s lifetime while reducing risk leading up to, and after, 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.