Industry superannuation funds are taking a closer look at life-cycle strategies, according to actuarial and consultancy firm Milliman.
"The retail market is certainly more advanced than the industry fund sector, with Fortnum Financial Advisors now offering this solution via E-Clipse online and others in the works," Milliman financial risk management practice leader Wade Matterson said.
"Having said that, industry funds are beginning to make progress in this direction and we are in advanced discussions with a number of them."
Life-cycle strategies have historically taken an asset allocation approach, whereby the exposure to growth assets is gradually reduced as the investor approaches retirement.
The idea is this reduces the risk of substantial drops in value during the last stages of a person's working life.
But in the United States, where these funds have been widely taken up, they did not live up to expectations during the global financial crisis and reported some significant negative returns.
Matterson said life-cycle strategies had changed dramatically as a result.
"As we are now well aware, asset allocation is a poor proxy for the risk that an investment is exposed to and, whilst diversification is necessary, it is imperfect," he said.
"What is important is the shape of the return distribution to which members are exposed."
Instead of reducing the exposure to growth assets as one approaches retirement, the new generation of life-cycle funds adopt capital protection strategies and set volatility targets that are managed through dynamic asset allocation to mitigate the risk of losing one's life savings.
The other benefit of that approach was investors could maintain a relatively high exposure to growth assets, Matterson said.
"Reducing growth exposure into retirement substantially impacts the likelihood of a member exhausting their superannuation assets early," he said.
Milliman research showed de-risking at the point of retirement from 70 per cent exposure - the average allocation of a balanced fund - to 50 per cent could more than double the likelihood of exhausting a member's superannuation assets at the age of 90.
The Cooper review pointed out the potential benefits of a life-cycle strategy and under the Stronger Super reforms, superannuation funds will be allowed to use life-cycle funds as their MySuper options.
But Matterson said funds did not have to opt for a stand-alone fund and could also offer this strategy as an overlay to existing funds.
"The largest issue for funds is whether they implement these strategies via member choice or through their default structures," he said.
"The potential attractiveness of a member-specific overlay is that their existing investment options could continue to operate as they do currently, but members would be able to add or remove the overlay as necessary.
"I think, over time, default strategies will become more sophisticated and tailored to fund members at different life stages and we're currently working with a few clients on assessing the implications of this."
