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A new paradigm in retirement planning

Mine Wealth + Wellbeing (Mine) Chief Investment Officer David Bell was presented with the BTIM Retirement Innovation Award at the SuperRatings awards dinner last night in Melbourne. David won the award for Mine over other nominees at QSuper, HESTA and Energy Super for his role in leading the development of the Member’s Default Utility Function (or MDUF v1 for short). This award reflects Mine’s significant focus on developing retirement outcome solutions and overall support for the MDUF v1 work.

MDUF v1 is a credible and powerful metric which can be used by industry, regulators and policymakers for varying purposes. It captures important preferences that would be sensible and appropriate for a super fund to assume on behalf of their members when designing default retirement solutions. MDUF v1 is a superior metric to use in the design of retirement outcome solutions and has recently been released following an 18 month development process by a large working group of industry practitioners and academic researchers.

Background

The super industry is facing the challenge of delivering retirement outcomes. This challenge is driving the need to develop products, strategies and solutions that better reflect member objectives and preferences in retirement. The problem is complex because retirement solutions require decisions on both investment and consumption (which interact with each other). The problem is made more complex by many factors such as:

  • the existence of multiple risks, notably risks to investment and mortality outcomes;
  • the large range of available products, solutions and services (yet a shortage of products exist in some key areas); and
  • the difficulties experienced by the industry in communicating complex financial solutions to members who, on average, have low levels of financial literacy.

The industry is further restricted by the absence of a quantifiable objective.

The MDUF v1 solution

MDUF v1 considers the question: “What is a sensible set of financial preferences for a trustee to assume on behalf of a default fund member?"

Lead author David Bell says MDUF v1 ignores behavioural biases and focusses on sustainable retirement outcomes. “MDUF v1 captures preferences which are intuitive, but are not considered by other metrics.” In particular, MDUF v1 recognises the following preferences:

  • Higher income
  • Smooth income
  • Outliving savings is a poor outcome
  • Residual benefit has value
  • People are risk averse

These preferences, and their trade-offs, are captured in a single holistic function (or metric). “MDUF v1 is a credible and powerful tool which can be used by industry, regulators and policymakers for varying purposes. Possible applications include post-retirement solution design by super funds and other product providers, the assessment of design by regulators and ratings groups and welfare analysis by policy groups,” continued David.

“The working group encourages the industry to collaborate further on addressing the retirement outcome challenge and see the sharing of this work as a step in that direction. Retirement outcomes has been a major focus area for Mine and the fund has been incredibly supportive in the design, launch and ongoing development of the tool. Peak industry bodies AIST and ASFA have both agreed to be custodians of this work. This means they support the research and are committed to making it available to the broader industry,” finished David.

Papers, presentations, models and FAQs in relation to MDUF v1 are available at membersdefaultutilityfunction.com.au and aist.asn.au/policy/member’s-default-utility-function-(mduf).aspx

    Additional information

    For any media enquiries, or for a personal briefing with MDUF v1 lead author David Bell, please contact:

    • Sarah Acocks, Executive Manager, Strategic Marketing | sarah.acocks@mine.com.au | 0438 323 400