Being a member of atypical lifecycle MySuper product throughout a member'sworking life could reduce their potential retirement savings by 23%at age 70.
This converts to$170,000 in foregone savings.
Lifecyclesuperannuation products are those that invest members' moneydifferently depending on their age. For example, younger memberswill have more of their superannuation allocated into equities andproperty and older members will have more allocated into bonds andcash.
These productsoperate differently to the more traditional single strategy MySuperproducts that use the same investment strategy regardless how old amember is.
RainmakerInformation's latest SuperannuationBenchmarking Report found that single strategy MySuper productsat least matched, and often beat, the lifecycle MySuper indexacross all age groups over the three and five-year performanceperiods to 30 June 2020.
"While thebest lifecycle products perform very well, there is massivedisparity between these and low-performing lifecycleproducts," said Alex Dunnin, executive director of researchat Rainmaker Information.
Reinforcing this,over the three year performance period to the end of November 2020, there was a 3.3percentage point gap between the top placed product, and the bottomplaced product.
COVID-19 made thisworse, with the difference in returns over the 12 months to 30November 2020 growing to 5.5 percentage points.
Of the fivelowest-performing lifecycle MySuper products, four were retail andone was a not-for-profit (NFP) fund.
Of the fivetop-performers, four were NFP funds and one was a retailfund.
Despite the currentperformance figures, Dunnin said that the idea behind lifecycleproducts remains compelling.
"As you getolder your investment risks are dialled down and a greaterproportion of your MySuper savings are allocated to moreconservative assets like bonds. There is less chance of losingmoney," he said.
"But thestrategic problem in the lifecycle sector is not the concept behindthem, but the huge variation in their outcomes. That is, as agroup, they don't seem to be actually working properly. Theirleading products are nevertheless extremelyimpressive."
"Too manylifecycle products are struggling to deliver on their promise.Heatmaps produced by the superannuation regulator, APRA, have foundpretty much the same thing."
The need to tackleunderperformance in superannuation has gained momentum followingthe announcement of the Your Future, Your Super reforms in the2020-21 Commonwealth Budget. For the first time, starting in 2021,super funds will have to pass an investment performancetest.
Dunnin said someadvocates of lifecycle MySuper have argued that it's notpossible to compare lifecycle investment strategies, and thatit's only when members retire that we'll know ifthey've achieved their goals.
"Butthat's absurd. It will be like telling parents that the firsttime they will ever see their child's school report is aftertheir child has left year 12," he said.
"If lifecycleproducts, as a group, don't improve, there's real riskthat pressure could grow for the regulator to prohibit them frombeing offered as default MySuperproducts'".
FUA in managed accounts platforms has continued its rapid growth, increasing by almost 50% p.a. in the last three years.
Australian retirees used to overwhelmingly favour retail superannuation funds. Not anymore.