How do you manage different investment requirements within the same super fund?
Before I answer this question, I need to define the problem. It’s best explained by an example.
Suppose your fund has members who are retired and some who are much younger. Let’s assume that the members have very different needs, requirements and outlook – for example the younger members might be happy to invest in riskier assets or even those that pay less income but have the potential for capital gain, while the retired members might be more conservative and more focused on the income they can receive from their super fund investments.
Investment strategy requirement
Under the super laws, all super fund trustees are required to draft an investment strategy. This must be in writing and must take into account the requirements of all members of the fund.
That is, in order to draft the strategy, it’s necessary to do a “top-down” analysis of the fund and then determine what is best for the fund as a whole taking into account a range of matters including the liquidity requirements of the fund and the risk of holding an asset.
The trustees of our example fund, with a combination of retirees and younger members, have to determine if they have sufficient cash flow (that is, liquidity) to make the necessary pension payments – as all pension payments must be met with cash or its near equivalent – and assess if the market value of returns is putting undue stress on retirees returns. They also have to see if they’re maximising returns for their younger members.
In the situation of disparate member needs, this investment strategy requirement for the fund as a whole can require some mental gymnastics.
Similar views but different objectives
Your super fund members – retirees and younger members – probably have different needs but might also have similar views about what assets will achieve their objectives.
For example, suppose all your members like ASX listed shares.
The retirees like the steady stream of dividends and franking credits because they have noticed that for the ASX200, these dividends have often increased faster than average wages. They want the dividends and associated franking credits to pay their pension payments.
On the other hand, the younger members want to take the ASX200 dividends and franking credits and reinvest them to earn more of the same because they have decided that this will be the best way for them to build wealth over the long-term, which ultimately can then be used to pay them an income stream when they retire.
You can see here that they both want to invest in the same type of investment but have very different purposes. In an ideal world, investing in the same assets but for different purposes is the best way to solve this problem.
Different views and different objectives
In some cases, your fund members will have very different views about how they want their super monies invested.
When this occurs, arguably the easiest way to solve it is to segregate member assets.
However, it can be a costly process and often is complex to sort out from a financial accounting perspective (in fact, some accountants have said to me that they nearly always struggle to correctly determine a super fund’s accounts that uses the segregated assets approach).
That said, essentially, segregation is a technique for splitting fund assets into different categories. For example, you might split assets between member types – for example, retirees members could be one category and working members could be another.
Alternatively, you could segregate assets to particular members of your fund.
The use of segregation enables a trustee to take into account different member objectives within the same fund via the investment strategy.
For further details about this topic please refer to an article I wrote in June 2016. As you will note from that article, segregation is nearly always more expensive to administer than unsegregated accounts.
Now if your fund members have different objectives and these can’t easily be reconciled, then segregation is probably the only way to solve this, unless you’re happy to use more than one super fund so different members can pursue their particular investments preferences. Without segregation it can be tricky to achieve vastly different strategies for diverse member profiles.
However, whilst tricky, it is possible that a financial planner will be able to build a portfolio that meets the various needs of members. Obviously, the adviser would charge a fee for their initial work and any ongoing monitoring and adjustments you may need.
Large super funds
It will be obvious to everyone that large super funds have always had the problem of different member profiles and requirements. How do they address this? There is no scientific approach to precisely solve this problem. The best any of these funds do is attempt to fix it by regularly looking at the age and working status of their members and then determining a suitable investment strategy that will apply to the majority of them, if any of those members don’t select their own investment strategy. This is often determined with the assistance of “asset consultants” or actuaries who specialise in this type of work.
They are typically called the “default” investment option. Often the justification for the investments selected in this investment fund will be to provide members with long-term growth in their super assets with as little volatility as possible.
If members of these large funds do not like the default option, then they would be adjusting their investments to suit their own preferences, taking into account the various options the large fund actually offers.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
