Time-weighted returns criticised

The superannuation industry needs to start attacking the use of time-weighted returns as a measure of performance and stop relying on long-term averages before they can combat sequencing risk, according to the chairman of retirement income at Challenger, Jeremy Cooper.

Time-weighted returns measure fund manager performance, but do not measure what happens to members' funds, Cooper said.

Cooper was speaking on a panel at a presentation on sequencing risk research commissioned by the Financial Services Institute of Australasia.

If the industry stopped trying to reach a more volatile 8 or 9 per cent return, and instead tried to reach a more stable 6 per cent per annum, the compounding returns right into retirement would be a better outcome for members, Cooper said.

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Chief executive of Equipsuper Danielle Press agreed that the industry needed to move away from time-weighted returns first, but said it was a challenge on how to implement solutions to sequencing risk.

The obvious solution of putting someone in a lifecycle fund or a target-date fund would not work because taking people out of the market two months after a market crash was just as bad as leaving them in, she said. 

The conversation had to move towards what is the best outcome for the member, and what is the risk the member needs to take to get to that outcome, she said.

However, Queensland University of Technology finance lecturer and co-author of the report, Dr Anup Basu, said that research into sequencing risk should not be taken to mean that average returns were not important.