20 March 2017

Over the past week Australian shares were 0.5% higher. Shares in developed countries rose 0.9% with the US market up 0.2%. Shares in emerging markets gained 4.3%. The Australian dollar was 2.1% higher at 77.04 US cents. The 10 year bond yield in Australia was 0.12% lower at 2.86% while in the US, the 10 year bond yield closed 0.07% lower at 2.50%. The oil price gained 0.6% to 48.78 US dollars per barrel.

Today we want to share with you news of a recent research milestone. Last week at the Conexus Post Retirement Conference we launched some important research on retirement outcomes. It was received positively by all in attendance. This research is highly complex, so today our aim is to provide a high level overview.

In our view the super industry doesn’t have clear measurable objectives around what it’s trying to achieve for members. It’s hard to do your best if your objectives aren’t clear. It has to be more than just a lump sum: after all this only gets you to the start of retirement.

The industry is facing up to the challenge of designing products and solutions which help members experience good retirement outcomes across a range of possible scenarios, notably:

  • Investment outcomes - for instance, what if markets perform below our expectations.
  • Mortality outcomes - for instance, what if I live much longer than I planned for.

So 18 months ago, we set about to develop a better, measurable objective. Adam Shao, Estelle Liu and I created and led a research panel of leading industry and academic experts. The panel worked to address the question “What is a sensible set of financial preferences for a super fund to assume on behalf of the members that we know little about (sometimes called default members)?”.

Five preferences are captured, some simple, some more complex:

  1. Members prefer higher rather than lower income in retirement.
  2. Members would prefer a smooth rather than a volatile income stream.
  3. It would be undesirable for a member to outlive their retirement savings or the income stream it generates.
  4. Members place some value on the remaining benefit at death.
  5. Members are ‘economically risk averse’. This means that the size of the joy experienced from a higher level of consumption is less than the size of the pain experienced by an equivalently sized reduction in consumption.

Some of these preferences pull against each other, for example point one versus point two and point three versus point four. So establishing trade-offs among these preferences was also critical.

These preferences were then converted into a rather complex looking mathematical formula.

This research has our Fund very well placed to develop and provide some of the best retirement solutions for our members.

In this age where everyone seems focused on competition you might question why we have shared this research with the broader industry. The answer is that firstly, we made a commitment to the other panel members that we would share this work. Secondly, we believe that collaboration among industry is important and that someone has to take the first step. We might receive valuable insights from other funds which we can apply to help our members. Finally, we’re proud of our values and while our number one focus is to our members, if we can help all Australians have an improved retirement then that’s a great contribution.

Sometimes it can take years for the benefits of excellent research to be realised. At Mine there are many exciting developments occurring behind the scenes. Capabilities are being developed which have us very well placed to help our members have an excellent retirement outcome.

Signing off

David Bell

Past performance isn't necessarily an indicator of future performance.
All data sourced from Bloomberg.