Superannuation funds need to take greater account of the value of franking credits to retirees in circumstances where they are worth 1.5% a year to retirees.
That is one of the bottom line assessments of research undertaken by Parametric examining how superannuation funds can deliver better retirement outcomes for retired members.
“Franking credits also should be added to the equation because they provide significant value to retirees,” the research noted authored by Raewyn Williams and Josh McKenzie said.
“Our research shows that franking credits on the S&P/ASX 200 are worth 1.5% annually to retirees and an active, franked dividend targeting strategy can add as much as 2% annually to retired fund members, albeit with a different risk profile.
“A pension-focused Australian equity strategy without franking visibility and ‘smarts’ misses an important portfolio lever to meet its income targets,” the pair said. “Can a super fund really answer credibly whether the equity yield outcomes are ‘successful’ without including franking?”
Williams and McKenzie said that superannuation funds needed to be willing to move beyond mechanical, accumulation style approaches to yield benchmarking.
Williams and McKenzie claim their suggested market-cap benchmark approach to yield will appeal to many funds.
“It’s relatively simple to implement, reflects familiar performance and benchmark concepts and showcases how a super fund’s thoughtful portfolio design can beat a ‘dumb beta’ equity portfolio yield outcome,” they said.
The pair said that a more ambitious challenge funds could take up is to measure yield ’success’ through the prism of the member – not the fund.
“For example, think about a fund with reasonable data or, for some, a good feel about member preferences. Members who would otherwise invest their retirement savings outside super in, say, term deposits, ‘blue-chip’ Australian companies or a rental property really want to know this: whether their decision, instead, to let their super fund invest to generate retirement income has been a good one. So that could translate to benchmarking the yield on their super retirement portfolio against yields on term deposits, blue-chip stocks or rental properties.”