Adam Butt

Design of MySuper default funds: influences and outcomes

We interview Australian fund executives about how their organisations responded to MySuper, a regulatory framework for default retirement savings funds that providers were required to have in place by the beginning of 2014. We provide an account of the influences on MySuper product design. Our analysis provides insight into how fund providers balanced their perceptions of the needs of default fund members against business considerations. Differences in member bases and organisational circumstances across funds are found to lead to considerable variation in default fund design.

Investment Strategies in Retirement: In the Presence of a Means-Tested Government Pension

A simulation approach is used to investigate how various investment strategies affect the ability of retirees to spend at a desired level up until death. Retirees are assumed to maintain all investment and longevity risk, and also have access to a government-sponsored and means-tested Age Pension to provide part of their desired expenditure. It is found that a 100% allocation to growth assets is optimal for large expenditure desires relative to initial balance levels, with allocations outside of this being sensitive to movements in initial balance and desired expenditure level, as well as interactions with the Age Pension.

Causes of Defined Benefit Pension Scheme Funding Ratio Volatility and Average Contribution Rates

Abstract Simulations of a model pension scheme are run with stochastic economic and demographic factors, with an aim to investigate the impact of these factors on movements in funding ratio and average contribution rates. These impacts are analysed by running regressions of movements in funding ratio and average contribution rates against the economic and demographic factors. It is found that, for a typical scheme closed to new entrants and a balanced asset allocation including equity investment, the mismatch between discount rate movements and investment returns is by far the biggest predictor of funding ratio movements, with average contribution rates affected more by events in a few individual years rather than averaged over an entire simulation. Where the scheme invests to cash-flow match liabilities, mortality improvement becomes the most significant predictor of funding ratio movements, although mortality improvement still has little impact on average contribution rates.

The Australian superannuation system post Stronger Super: views from fund executives

Over the past five years, the Australian superannuation system has been subject to a programme of policy and regulatory change of considerable scope and ambition: the Stronger Super initiatives. This article presents the findings of qualitative research undertaken with the fund executives on whom much of the burden of responding to the changes has fallen. It finds misgivings around the new reporting regime, the systems overwhelming focus on the accumulation phase and the provision of choice to members, as well as widespread fatigue from continued regulatory change. It also finds a predictable diversity of views on funds’ alignment with members’ needs and the desirability of scale.

What dividend imputation means for retirement savers

We use a stochastic life-cycle model to examine the implications for Australian retirees of full access to dividend imputation credits. We find that the availability of imputation credits can justify a significant bias towards Australian equities in retirement portfolios, largely at the expense of world equities. We also generate estimates of the value of imputation credits to retirees, finding it could potentially support increased consumption during retirement of 5%-6%, or the equivalent of a higher balance at retirement by 8%-9%. Our study enhances the understanding of equity home bias and provides insights relevant for public policy.

Stochastic Economic Models for Actuarial Use: An Example from China

Abstract In this paper, the first study of stochastic economic modelling with Chinese data is conducted for actuarial use. Univariate models, vector autoregression and two cascade systems (equity-driving cascade system and price-inflation-driving cascade system) are described and compared. We focus on six major economic assumptions for modelling purposes, which are price inflation rate, wage inflation rate, long-term interest rate, short-term interest rate, equity total return and bond total return. Granger causality tests are used to identify the driving force of a cascade system. Robust standard errors are estimated for each model. Diagnostic checking of residuals, goodness-of-fit measures and out-of-sample validations are applied for model selection. By comparing different models for each variable, we find that the equity-driving cascade system is the best structure for actuarial use in China. The forecasts of the variables could be applied as economic inputs to stochastic projection models of insurance portfolios or pension funds for short-term asset and liability cash flow forecasting.

The Effect of Objective Functions on Investment and Contribution Decisions for Defined Benefit Pension Schemes

This paper examines the effect of objective function structures on the optimal management decisions (in particular, asset allocation and surplus/deficit spread period) for a model defined benefit superannuation scheme. The objectives of employer-sponsors, members and trustees are identified, with three risks being quantified and incorporated into different objective functions as used in previous studies. These are contribution rate risk, excess contribution rate risk and funding level risk. Simulation of a model scheme which is closed to new entrants is carried out to generate numerical values for the risks and consequently a single value from the range of different objective functions observed in the literature. Investigation of whether consistency exists between various objective functions in terms of optimal strategies is undertaken. It is found that there are considerable variations in the optimal decisions derived from each objective function, based on the same set of simulated outcomes. These variations are up to 87% in equity allocation and 14 years of surplus/deficit spread period. Such variations can be explained by either the risks that are considered or the way that the risks are measured. Further analysis is then undertaken of the impact of weighting parameter values on the optimal decisions with this analysis discovering that some of the objective functions tested are not appropriate for the investigation being undertaken. An overall outcome of the paper is the confirmation that it is vital to choose the most appropriate objective function based on the function’s characteristics and on the particular circumstances of the defined benefit scheme, in order to ensure that the optimal decisions are made for the scheme.