Adam Walk

Retirement adequacy through higher contributions: is this the only way?

Australia is increasing the legislated minimum and compulsory provision of retirement savings for employees (known as the superannuation guarantee, SG) from 9% to 12% of salary. Using a simulation approach, the article finds that retirement adequacy generally improves under the increased SG provision, particularly if a relatively favorable sequence of returns is experienced over the employee’s working life. Using a variety of default options, the authors show that increasing the contributions of workers without appropriately altering the asset allocation strategy of their investments may expose them to greater sequencing risk, potentially undermining the objectives of the contribution increase. The retirement outcomes sought by increasing the SG can be achieved through a dynamic life-cycle approach to portfolio design without necessarily increasing the contribution rate.

Conditional Allocations to Real Estate: An Antidote to Sequencing Risk in Defined Contribution Retirement Plans

In this article, the authors investigate the potential for real estate as an asset class to be exploited to protect against sequencing risk (or path dependency) in defined contribution retirement funds. Their results suggest that allocating both listed and unlisted real estate assets to retirement portfolios, even if very minor, can enhance the risk–return profile and probability of successfully achieving retirement outcomes. Using a bootstrap simulation approach, the authors test for a range of asset allocations that include real estate. In addition, they examine the sensitivity of real estate performance to changes in monetary policy to optimize portfolio outcomes for fund managers who actively seek exposure to real estate assets. Their findings indicate that the performance of real estate is highly dependent on monetary policy settings that, when used in a dynamic asset allocation process, have the potential to enhance portfolio returns while limiting the impact of downside risk.

On the Responsible Investment Disclosure Practices of the World's Largest Pension Funds

Purpose - This study seeks to measure the level of responsible investment (RI) disclosure of the worlds largest pension funds. Design/methodology/approach - The public disclosure of environmental, social and governance factors by the worlds largest pension funds reflect their genuine commitment to this new investment paradigm. The UNPRI criterion is employed to measure the level of public disclosure. One hour was allocated to every asset owners web site to search and collect public information. Findings - Overall, the level of public disclosure of RI activities is not prolific. The study is negatively influenced by North American pension funds who dominate this sample. Public disclosure practices are positive for European funds. The size of funds under management positively influences the public disclosure and reflects their leadership role in the industry. Research limitations/implications - Limitations include: the largest pension funds are dominated by North American funds and reflect the impact of fund size. The results are from the largest pension funds and may not be representative of the entire industry; the positive findings from European funds reflect a material subset of the global asset owners; and, we do not engage directly with the funds in question. Measurements are sourced from public disclosure. Originality/value - The lack of public disclosure of RI by North American funds suggests that these institutions do not believe that it is important to investors. It suggests that these asset owners have not yet been exposed to the same influences as European funds. Given that North American funds together own substantial interests in listed corporations, they are much more important to influence than corporations.

Withdrawal capacity in the face of expected and unexpected health and aged-care expenses during retirement

We examine the consequences of taking account of costs associated with age-related health treatment and agedcare services during the retirement phase. Simulating asset return data using historical bootstrap simulation, we derive an optimal withdrawal income during retirement using dynamic optimization techniques. The greatest risk to income sustainability occurs when unexpected health costs combine with above-average longevity for conservative investors. High costs of health treatment without a commensurate adjustment in asset allocation toward assets with a less conservative risk-return profile risk premature wealth depletion. The risk of ruin can be mitigated through a dynamic life-cycle strategy during the retirement phase.

Governance: The Sine Qua Non of Retirement Security

In defined contribution (DC) systems, plan participants become the equivalent of miniature (underfunded) life insurance companies that insure only one person who has very limited skills in managing the risks being faced—principally, investment risk, inflation risk, and longevity risk—while still striving to achieve an adequate income. Thus, in the DC context, where pooling or risk sharing is eliminated or greatly reduced, achieving retirement security for all plan participants is clearly a challenge. This article proposes changes to governance and the regulatory framework aimed at meeting this challenge and ensuring adequate incomes in retirement.

Retirement Adequacy of Indigenous Australians: A Baseline Study

This baseline study examines the retirement adequacy of indigenous Australians. Using indigenous Australian demographic and employment data, we construct a forty years retirement savings profile. We employ simulation techniques to estimate the superannuation balance of a “typical” indigenous worker. The findings reveal that the retirement outcomes of indigenous workers are approximately 27 per cent lower than the average non-indigenous worker. We also provide baseline estimates of the gender gap in retirement outcomes for indigenous workers. We concede that improving indigenous lifetime outcomes is a significant public policy issue; one that requires many more policy levers than those available to financial economists.