Superannuation funds are revisiting the asset allocation decision in their default option given the evolution taking place in the industry with more members moving from the accumulation phase to retirement.
PIMCO Australia chief executive John Wilson said default options should meet two criteria.
The first was to maximise the likelihood that most members would meet their retirement income needs and the second was to incorporate members' capacity for risk, he said.
However, PM Capital enhanced yield portfolio manager Jarod Dawson doubted that retirees would be happy to tolerate a loss of their capital in generating that income.
Wingate Asset Management chief investment officer Chad Padowitz asked "would you sell Johnson & Johnson on a 3 per cent dividend yield to buy their bonds at 1 per cent?"
Wilson said funds that targeted a retirement income replacement goal and were 'outcome-oriented' were likely to be the next generation of super fund.
"One of the keys to meeting a set income replacement goal is to understand how much members can afford to lose at every age as they approach retirement," he said.
Lifecycle strategies which increased allocations to lower risk assets over time were an attractive investment default option for both participants and the super funds.
"When you compare the 75/25 asset allocation default approach to an automatic lifecycle approach in which more is allocated to lower-risk income assets as an individual gets older," Wilson said.
"More members can get closer to the median or target outcome over time.
"If you look at ASFA [Association of Superannuation Funds of Australia] risk measures, the lifecycle approach clearly better incorporates members' capacity for risk at every stage of retirement saving."
Dawson agreed that an ageing population would have a greater demand for income producing assets.
"If you asked those same people whether they would be happy to tolerate a loss of their capital in generating that income, the overwhelming response would be 'no', " he said.
"The first port of call for any rational investor should be to maintain their capital and then to generate an attractive level of income and/or growth beyond that."
Padowitz said that for many investors, "it is advisable to get a greater portion of total return via income as opposed to potential capital gains, due to its greater certainty and lower risk attributes".
However, not considering valuation was a perhaps greater risk. For instance moving from equities to fixed income at the current time was a higher risk strategy, as most seemingly defensive, income-based assets were exceptionally expensive, he said.
In a risk-averse environment, much like the current situation, there were already large pools of money chasing these assets and retirees were probably late to the party and "may only get to feel the hangover", he added.
