Crisis drives default fund re-think

Reserve funds should be considered

By Christine St Anne
Tue 17 Mar 2009

Default funds will need to restructure if super funds are to protect their members during the financial market crisis.

Superannuation funds will have to re-think the structure of their default funds in light of the global financial markets crisis, according to an industry consultant.

Traditional investment thinking now needs to take into account extreme market events, FineAnswers director Jon Glass told a Pimco lunch in Sydney yesterday. 

"Default funds have previously relied on the traditional investment thinking of the ERP [equity risk premium]. However, by relying on the ERP, returns for these funds may rise during bull markets and fall substantially in bear markets," Glass said.

"Let's look at our beliefs and ask ourselves are those the sorts of big bets we are prepared to take."

Glass said default funds need to be restructured so that members can benefit from the upside but be protected in the downturn.

"Default funds need to restructured so that part but not all the benefits of an up market are delivered to members," he said.

"From that framework these default funds can be built to take the pressure off when markets fall, so that members don't have to be so affected by the gut-wrenching events of down markets."

Default funds may also not work for older people and this is something superannuation funds will need to look at.

Glass also said superannuation funds should consider a reserve fund as part of their accumulation option. Such funds can then be used to smooth volatility when markets fall.

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