Taking a long-term perspective when measuring superannuation returns ignores risk and fails to take into account the behaviour of members, according to actuarial services provider Milliman.
Milliman practice leader Wade Matterson said in a blog that, while measuring returns for investors is relatively simple, measuring risk is where the challenge lies.
He said investor behaviour is “often driven by emotion-charged cognitive failures”.
Mr Matterson said the Productivity Commission’s draft report, How to assess the superannuation system’s performance, suggests that system-wide average net returns reflect the impact of diversification and market volatility and “is in line with the industry’s view that a long-term measure of 20 years effectively captures risk-adjusted returns”.
He said investor behaviour is “often driven by emotion-charged cognitive failures”.
Mr Matterson said the Productivity Commission’s draft report, How to assess the superannuation system’s performance, suggests that system-wide average net returns reflect the impact of diversification and market volatility and “is in line with the industry’s view that a long-term measure of 20 years effectively captures risk-adjusted returns”.
However, he noted this projection unfortunately “doesn’t reflect the reality of investors”.
“A 20-year long-term perspective may effectively capture risk-adjusted returns but it doesn’t reflect the damaging risk of investor behaviour, which all too often destroys real returns,” Mr Matterson said.
“Ultimately, risk must be linked to a member’s goals.”
Mr Matterson said that linking risk to member goals requires funds to use greater actuarial and technical firepower to analyse the disparate needs of their members, and to make far fewer assumptions about what their members require.
He said, for example, that the super industry regularly relies on ‘comfortable retirement’ measures even though those measures often neglect money and assets outside of super.
“The only way to find out this information is to forge a far closer relationship with members,” Mr Matterson said.
“This will, in turn, underpin more tailored communications, investment strategies and product solutions.
“This is a harder path for funds but one that will differentiate them from other funds and create closer ties with members.”
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