Lifecycle marketing mis-aligned to risk management

Super funds may be overly focused on marketing lifecycle strategies as set-and-forget investment options and ignore the risks of the investment vehicle, according to Milliman.

Milliman practice leader Wade Matterson said lifecycle strategies had been positioned to members as a set-and-forget strategy that would solve all their problems — particularly for the disengaged member — but an over-reliance on target dates ignored a number of key risks.

"We're trying to solve quite a complex problem and have been focusing on the marketing angle," he said.

"We want to have a simple story which is, ‘we'll de-risk you into bonds', but while the story's simple, the evidence shows us it doesn't necessarily always deliver what we think it will deliver."

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In the US, lifecycle strategies with a target date of 2010 saw 20-30 per cent losses due to high allocations to fixed income and bond market performance in 2008.

"To me the marketing message that went out and the reality were so disconnected that people could argue that they were completely mis-sold," he said.

Matterson said regulations had caused funds to try to implement a quick solution to MySuper, one that asset consultants were more than happy to recommend. However, diversification was not adequate to manage investment risk.

Lifecycle strategies needed direct risk management including a focus on downside risk, according to Mattherson, "whether that's a hedging approach, a tailrisk strategy, volatility targeting — all these types of things that are more focused on managing those risks".

Mattherson said funds should develop separate member accounts which could focus on standard asset allocation to help manage market risk and/or longevity, and an additional account which related to the member's life-stage.

"What that allows you to do is have separate rules to wrap around that to build appropriate strategies that are very much targeted to different cohorts or individuals," he said.

"You can deliver it through a separate advice network and can be very flexible in the way you apply those concepts if you unbundle it — but if you put it all together in a single product you're locked in."