In its 2014 MySuper Market Trends report, Mercer said that while both the cohort and member-switching approaches to lifecycle products aim to reduce risk as a member ages, this reduction is substantially less frequent and larger in scale in member-switching funds.
The ‘member-switching’ approach generally involves using a super fund’s existing diversified options and systematically shifting members from the high-growth options to the more defensive ones as they age, the report said.
‘Cohort’ funds, on the other hand, pool members with similar characteristics into an investment fund that is managed over time based on their common circumstances.
This approach is typically based on the member’s date of birth.
The statistics revealed de-risking switches generally occur five times under member-switching funds, while cohort funds have an average of nine cohorts or reductions in risk.
The report argued that given the systematic nature of switches with the member-switching approach, the more gradual risk reduction over time under the cohort approach was a “preferable and a prudent way to minimise the chance of switching at the wrong time, such as directly after a large fall in equities”.
The cohort approach is currently favoured mostly by the retail funds, with 10 of the 14 retail lifecycle products adopting this approach.
The report found that of the 12 funds currently using this approach, seven pool members within 10-year investment cohorts; four use five-year bands; and the remaining fund groups members based on age and superannuation balance .
The report said while one-year cohorts would be optimal, this could be challenging in terms of administration as well as cost-prohibitive for some fund providers.
