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Australian super asset allocations leaving investors at risk

Australian superannuation asset allocations leaving investors at risk – CIFR

12 August 2014 (Sydney): The Centre for International Finance and Regulation (CIFR) today released results of a study into the ‘retirement risk zone’, concluding that the current investment choices made within many super plans were not ideal for those immediately pre- and post-retirement.

The CIFR-funded study, by Professor Geoffrey Kingston and Professor Lance Fisher, both of Macquarie University, identified the most common mix of investment classes in Australian super portfolios as an ‘aggressive constant mix’, in which 70-90% of assets are allocated to growth assets. This asset allocation has remained surprisingly dominant even in the past five years, when many retirees were hurt in the downturn after the 2008 Global Financial Crisis.

The authors suggest that the issue with the dominant aggressive constant-mix is that retirees’ assets are not set up correctly as they approach retirement.

“Current strategies leave retirees particularly exposed due to high allocations to growth assets,” said lead author Professor Geoffrey Kingston. “If the share of growth assets is progressively scaled back to about half, the risk experienced around retirement can be managed.”

United States trends suggest that Australia is falling behind best practice and the study asserts it is time that Australian practice shifted away from constant-mix asset allocations, laying responsibility for making this happen with the industry, ASIC, APRA and individual households.

“Professor Kingston quotes Ken Henry, who noted that Australian super funds allocate only slightly more than a tenth of assets to fixed income while the OECD average allocation is approximately half.”

In Australia, seven out of 10 households rely primarily on their pension for an income in retirement and nine out of 10 households draw some pension during retirement. This issue has been top of mind for policymakers, said Professor Kingston. “By ensuring superannuation assets are less risky aound the point of retirement, we can positively impact Australia’s pension liabilities.”

Professor Kingston concludes by suggesting the introduction of a different asset allocation strategy for retirement funds, whereby exposure to risky assets drops on approach to retirement age and rises again following retirement (see figure 1 following).


About the authors:
Professor Geoffrey Kingston
Professor Kingston obtained his Bachelor and PhD degrees from the Australian National University. Before moving to Macquarie University in 2009, he lectured at the University of Western Ontario, the University of Queensland, The University of Sydney and UNSW Australia. He has published in the Quarterly Journal of Economics, Economic Journal, Journal of International Economics, International Economic Review, Journal of Money, Credit and Banking, Journal of Monetary Economics, Journal of Public Economics and Journal of Economic Dynamics and Control. His co-authored book on superannuation was published in 2001 by Cambridge University Press.

Professor Lance Fisher
Professor Fisher was appointed Professor of Economics at Macquarie University in February, 2008. Previously he was with the Department of Economics at UNSW Australia for twenty years. He has held visiting appointments at several universities, including Virginia Tech, Yonsei, The Australian National University and The University of Melbourne. He has also been a visiting fellow at the Reserve Bank of Australia. His principal area of research interest is macroeconomics and macroeconomic modelling.

Professor Fisher has investigated identification methods in structural macroeconomic models. He has applied these methods to the study of consumption and wealth in Australia and the United States and to the study of business cycles more generally. He has estimated predictive models for government expenditure and asset returns. His work on asset return predictability forms the basis for his current research with Professor Geoffrey Kingston on managing superannuation in later life

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