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Super asset allocations leaving investors at risk

by Andrew Starke | 12 Aug 2014

Australia’s love affair with stocks really took off in the 1980s but as some of those baby boomers retire, this 'cult of equity' is leaving its disciples with deeply flawed portfolios.

While the global financial crisis (GFC) exposed portfolios too heavily tilted towards shares and sent investors scurrying into more defensive asset classes such as cash, term deposits and bonds, it seems Australians have been quick to forgive and forget.

The Centre for International Finance and Regulation (CIFR) yesterday released results of a study into retirement adequacy, concluding that the current investment choices made within many super plans were not ideal for those immediately pre- and post-retirement.

The CIFR-funded study, undertaken by Professor Geoffrey Kingston and Professor Lance Fisher, both of Macquarie University, identified the most common mix of investment classes in Australian super portfolios as an ‘aggressive constant mix’, in which 70 to 90 per cent of assets are allocated to growth assets. 

This asset allocation has remained surprisingly dominant even in the past five years, when many retirees were hurt in the downturn after the GFC. The authors suggest that the issue with the dominant aggressive constant-mix is that retirees’ assets are not set up correctly as they approach retirement. 

"Current strategies leave retirees particularly exposed due to high allocations to growth assets," said lead author Professor Kingston. "If the share of growth assets is progressively scaled back to about half, the risk experienced around retirement can be managed."

Best practice blues

United States trends suggest that Australia is falling behind best practice and the study asserts it is time that Australian practice shifted away from constant-mix asset allocations, laying responsibility for making this happen with the industry, regulators and individual households. 

Professor Kingston quotes Ken Henry, who noted that Australian super funds allocate only slightly more than a tenth of assets to fixed income while the OECD average allocation is approximately half.

"In Australia, seven out of 10 households rely primarily on their pension for an income in retirement and nine out of 10 households draw some pension during retirement," he said. 

"This issue has been top of mind for policymakers. By ensuring superannuation assets are less risky around the point of retirement we can positively impact Australia’s pension liabilities."

Professor Kingston concluded by suggesting the introduction of a different asset allocation strategy for retirement funds, whereby exposure to risky assets drops on approach to retirement age and rises again following retirement.

Post retirement strategies, products and solutions

The complex and pressing questions for superannuants in the retirement risk zone will be the focus of discussion at Finsia's Annual Conference on 10 October. For more detail, and to register, click here.

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  • | Aug 12, 2014

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