Super allocations leave ‘investors at risk’

Australian super funds are falling behind global best practice on asset allocation strategy, leaving many pre-retirees at risk, argues a newly released academic paper.

The Centre for International Finance and Regulation (CIFR) has released the results of a study conducted by Macquarie University professors Geoffrey Kingston and Lance Fisher, which has raised a number of concerns about the investment philosophy of some Australian superannuation managers.

The researchers identified an “aggressive constant mix” as the most common investment strategy of Australian superannuation portfolios, defining this as portfolios in which between 70 per cent and 90 per cent of assets are allocations to growth investments, arguing this approach is not optimal for many consumers.

piggy“Current strategies leave retirees particularly exposed due to high allocations to growth assets,” said co-author Professor Geoffrey Kingston, commenting on the findings of the study.

“If the share of growth assets is progressively scaled back to about half, the risk experienced around retirement can be managed.”

In addition, the report states that “United States trends suggest that Australia is falling behind best practice” in its maintenance of focus on “constant-mix asset allocations”, calling on the superannuation industry, as well as regulators ASIC and APRA and “individual households” to take responsibility for altering the dominant investment philosophy.

Reflecting on a point made by former Treasury secretary Ken Henry, the report drew attention to the suggestion that “Australian super funds allocate only slightly more than a tenth of assets to fixed income while the OECD average allocation is approximately half”.

The report also suggests a long-term fiscal benefit in altering course when it comes to superannuation asset allocation strategy.

“By ensuring superannuation assets are less risky around the point of retirement, we can positively impact Australia’s pension liabilities,” Professor Kingston concluded, adding that seven out of 10 households rely primarily on pension for retirement income.

Aleks Vickovich
Investor Daily