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CSIRO-Monash Superannuation Research Cluster

Research Report

The CSIRO-Monash Superannuation Research Cluster Newsletter
4 April 2016

Update from the Cluster Leader
Now in the third year of our research program, the CSIRO-Monash Superannuation Research Cluster has developed a strong body of work providing critical insights on key challenges for the future of Australia's superannuation and retirement systems.
Following active engagement between our researchers and key stakeholders including policymakers and industry participants, the multi-disciplinary international research team that forms the Cluster has now delivered more than 30 papers that help inform this important area of public policy.
A further 11 working papers will be released in 2016, focusing on superannuation and the economy, and the needs of Australians over 60. These papers are also expected to provide strong contributions to the policy debate in this area.
The modelling work and original datasets being developed by the Cluster are yielding strong results and generating considerable interest from stakeholders, and a number of the research papers have been accepted for publication in highly rated academic journals.
I am delighted to bring you the first edition of the CSIRO-Monash Superannuation Research Cluster Newsletter for 2016 which highlights three new papers that will be of great interest to our stakeholders. These papers include groundbreaking research on indigenous retirement adequacy, and critical analysis of the problem of age discrimination for older workers and the cost implications of superannuation governance reforms.
This issue of the newsletter also provides an overview of our December 2015 Symposium which showcased some of the exciting work underway and already completed by the Cluster research teams.
For more details on research being undertaken by the Research Cluster please visit our website

We trust you will enjoy reading this edition of the Newsletter.

Professor Deborah Ralston
Cluster Leader
CSIRO-Monash Superannuation Research Cluster

The Latest Working Papers
The key findings of the three latest working papers released by the Cluster research teams are outlined below, with links to the full papers on the Cluster website.

Indigenous workers face a 27% retirement wealth gap relative to non-indigenous workers
Landmark research on retirement adequacy for indigenous workers reveals a retirement wealth gap of 27% and 39% for indigenous male and female workers, respectively, when compared with the median non-indigenous male worker. This potentially translates to $165,000 less in superannuation for the average indigenous worker at age 65.
The study, conducted by Griffith University researchers Assoc. Prof. Robert J. Bianchi, Adjunct Prof. Michael E. Drew, Dr Adam N. Walk and Dr Osei K. Wiafe, models the superannuation balances of a full-time employed indigenous worker with that of non-indigenous worker over a 40-year investment horizon.
This new research indicates that only 20% of full-time employed indigenous workers will accumulate enough superannuation savings to maintain a satisfactory standard of living in retirement (based on ASFA’s estimated income of $42,569 per annum which is required for a comfortable retirement for a single retiree). It also suggests non-indigenous female workers face similar retirement outcomes to that of indigenous male workers.
Assoc. Prof. Rob Bianchi said: “Our study of the lifetime impact of earnings differences on retirement outcomes shines a spotlight on the extent to which disparity in income levels today results in a significant retirement wealth gap after a 40-year career.”
This study was prompted by discussions with members of the Aboriginal and Torres Strait Islander community at a 2015 AIST Indigenous Super Summit which highlighted the lack of data collected on indigenous superannuation fund members both by superannuation funds and the Australian Bureau of Statistics. Assoc. Prof. Bianchi said: “It will be important to collect and gain more granularity in the data on indigenous super fund members to enable further research in this area and to ensure superannuation funds can develop appropriate retirement solutions for these members.”
Age discrimination problem for older workers may be overstated
With age discrimination being widely viewed as a serious impediment to older workers’ employment, both in Australia and in many other countries with ageing populations, efforts to overcome age discrimination have formed a key plank of policy making in recent years. However, “older workers are no more likely to experience aspects of everyday discrimination than younger workers,” according to a new survey-based study undertaken by Federation University Australia researchers Prof. Philip Taylor and Dr Catherine Earl.
The authors note that “This finding does not imply the absence of labour market barriers affecting older workers. Rather, at least some of the barriers they do face appear to be similarly experienced by other workers.”
From a social policy perspective, the study indicates that there would be merit in expanding consideration of age discrimination to include all age cohorts, not just older age groups.
Prof. Taylor and Dr Earl argue that “There may be an overemphasis on tackling age discrimination facing older workers that obscures proper consideration of barriers to their participation and may entrench ageist perceptions among labour market actors. Focused on jobseekers and workers aged over 50, age discrimination policies don’t appear to consider other sociological factors that may influence older workers’ prospects or any experiences of younger workers.”
Superannuation governance reforms could push up costs
Superannuation governance reforms in Australia and the UK are designed to improve performance and reduce costs. However, new CSIRO-Monash research reviewing superannuation (pension) governance in Australia and the UK indicates that regulatory reforms tend to raise overall management expenses.
“The proliferation of regulation entails ever higher compliance costs and, in consequence, government actually exacerbates the very problem it seeks to [solve]”, according to Prof. Noel Whiteside, Professor of Comparative Public Policy at the University of Warwick.
While there are many differences between the Australian and UK super (pension) arrangements, following the introduction of auto-enrolment in the UK in 2012 they are increasingly similar market-based systems. Prof. Whiteside said: “Evidence suggests that market competition does reduce the charges and fees of pension providers … but the process is very slow.”
UK regulatory interventions to secure lower fees and better market performance have generally been more extensive whereas Australia’s relatively strong fund performance is due to its more buoyant economy has enabled greater popular support for super. However, Prof. Whiteside said: “Whether super will sustain its appeal in a colder financial climate remains an open question. And, when markets fail, publics turn to government for more protection, not less.”
CSIRO-Monash Superannuation Research Conference

The annual CSIRO-Monash Superannuation Research Symposium was held on 1 and 2 December 2015 by the Australian Centre for Financial Studies. The Symposium provided an excellent forum for researchers to share their findings with stakeholders, those working in the industry, policymakers and other researchers.
With population ageing and the large baby boomer cohort moving in the retirement phase over the next 10 years, one of the critical challenges for policymakers is the question of how to reduce the call on public finances while ensuring that retirees have sufficient income to support their expected standard of living. Key policy issues addressed at the Symposium included: the purpose of superannuation; approaches to fund management for retirement income; the development and pricing of retirement income products; the financial implications of rising health care costs for ageing Australians; gender issues in superannuation; and financial literacy amongst retirees and financial product design.

The ‘delivery’ of pension savings, investment and income: governance and management issues in the Australian and international context
Prof. Gordon Clark (Oxford University)

In his plenary address, Prof. Clark discussed the need for governments and policymakers to define the overall objective of their pension system and he raised the question of how we should design and assess institutions which deliver retirement income. He suggested that pension (superannuation) funds need to define and understand their purpose, and this should dictate the structure of the institution. However, defining a singular purpose is difficult as objectives may conflict, for example, a fund may want to ensure capital is never reduced through losses while earning high returns and operating at a low cost. He noted that the board has a vital role to play in identifying and agreeing on a shared purpose for the organisation, and embedding this within the organisation. An agreed purpose is critical for boards to make necessary, long-term decisions such as investing in skills and infrastructure.

Super and the Economy
Prof. James Giesecke (Victoria University)

Prof. Giesecke presented his computable general equilibrium (CGE) model of the Australian economy incorporating the financial sector, and he indicated that this is an important step forward because, “most economic models have been completely silent on what’s happening in the financial markets”. Prof. Giesecke simulated a 1 per cent increase in the superannuation guarantee rate, identifying two components of the consequences of this shock: an intermediation effect (an increase in the proportion of household savings going into the superannuation sector) and a savings effect (a rise in the household savings rate). The simulation predicts a decrease in the current account deficit due to a rising savings rate, but also a depreciation of the Australian dollar as increased intermediation of funds through the superannuation sector would see a rise in outbound investment. Employment would suffer in the short run as a higher savings rate would initially reduce consumption, but higher employment would follow as the economy adjusts to a higher savings rate and benefits from growth in the capital stock. The simulation suggests that a higher super contribution rate would not materially affect macroeconomic stability. While the datasets used for the modelling predate the significant growth of self-managed super funds in Australia, these findings provide valuable guidance to policymakers and regulators. CSIRO Quantitative Modelling
Dr Andrew Reeson, Dr Zili Zhu and Dr Pavel Shevchenko (CSIRO)

Interestingly, based on analysis of superannuation withdrawal patterns using Australian Taxation Office (ATO) data, Dr Reeson found little evidence of ‘decumulation’ for either APRA funds or self-managed superannuation funds (SMSFs). He found that both types of fund continue to grow in value (on average) throughout people’s lives, with only a modest decline after the age of 70. This suggests that today’s retirees are unlikely to utilise the majority of their superannuation savings during their lifetime. Dr Reeson highlighted two possible reasons for this: the desire to leave a bequest; and the psychological challenge of switching from saving throughout one’s life to consuming in retirement. In addition, minimum drawdown rates may be acting as a ‘default’ benchmark for retirees seeking to mitigate against longevity risk.
Dr Zhu presented a cascading multi-factor model to forecast future economic scenarios, and a ‘simulation with uncertainty for pension analysis’ (SUPA) model to forecast superannuation fund balances. He outlined a framework for retirement life-cycle management whereby retirees use dynamic strategies to decide whether they should, say, invest in a life annuity or invest in the share market (or progressively switch from one to the other). Dr Shevchenko examined retirement product design and the pricing of variable annuities with guarantees. He noted that pricing these products (which are affected by equity risk, interest rate risk, systematic mortality risk and human behaviour) is a difficult numerical problem. Current industry pricing techniques are computationally intensive. CSIRO is developing prototype software to accurately price such products in real time. Funds Management
Assoc. Prof. Paul Lajbcygier, Dr Huu Duong, Manh Pham and Dr Mikhail Tupitsyn (Monash University)
Assoc. Prof. Lajbcygier examined the use of a nonparametric ‘generalised additive model’ (GAM) to measure market impact costs, i.e. the cost associated with a large trade moving the price of a security with low liquidity. Associate Prof. Lajbcygier and Mr Pham suggested that market impact costs are particularly severe for alternative index and ‘smart beta’ products that are not anchored to price. While alternative indexing might appear to perform better than market cap-weighted indexing (MCWI) without costs, market impact is a large hidden cost of trading that is often overlooked. As the turnover of the average active fund is 100 per cent per annum (versus just 15 per cent for index funds), market impact costs tend to add up over time.
Dr Tupitsyn’s research on passive hedge funds found that two-thirds of hedge funds exhibit linear factor exposures, one-fifth exhibit nonlinear factor exposures, and one-fifth do not have significant linear or nonlinear exposures to alternative risk factors. Surprisingly, nonlinear active funds underperform linear passive funds. If nonlinear active fund performance is seen as a proxy for ‘beta’ in a portfolio, the findings suggest that active fund managers do not outperform passive fund managers over time. This adds to evidence from other studies that it is challenging for active fund managers to consistently produce superior returns over time. It may be an important consideration for superannuation fund managers when awarding mandates to external fund managers. Investing in Infrastructure
Assoc. Professor Robert Bianchi (Griffith University) Assoc. Prof. Bianchi examined the ability of conventional asset pricing models to forecast infrastructure returns. He noted that it is not surprising that superannuation funds should be attracted to infrastructure, given the long-term nature of its cash flows. Using 16 years of monthly return data, he found that simple historical mean returns seem to outperform conventional asset pricing models in predicting listed infrastructure returns over a number of time horizons. Future research work will examine unlisted infrastructure.
Assoc. Prof. Bianchi also examined the question of whether infrastructure is a unique asset class or a subset of other asset classes. Applying the ‘Merton zero-intercept criterion’ to seven MSCI world and regional infrastructure indices, he found that global and European infrastructure index returns can be replicated with a linear combination of world stocks, world utilities, large-cap returns and growth-related returns. This suggests that listed infrastructure cannot be defined as a separate asset class. One exception is listed infrastructure returns in the Asia-Pacific region, where returns could not be replicated utilising the same methodology used for other jurisdictions. Retirement wealth and health
Prof. Anthony Harris and Dr Sonja Kassenboehmer (Monash University)

Prof. Harris’ work models the effect of increasing life expectancy on healthcare costs. He said this primarily depends on whether increased lifespan results in an increase in the number of ‘healthy’ years (with large healthcare costs being simply deferred) or an increase in the number of ‘frail’ years (which involves large health costs over a longer period and a significant increase in total health expenditure). Healthcare costs are also expected to increase as wealth grows. It will be interesting to see how providers respond to the increasing age and wealth of their customers, and whether it results in greater choice and increased variability in costs of products and services being offered.
Dr Kassenboehmer’s paper focuses on the relationship between ‘locus of control’ (a psychological concept capturing individuals’ beliefs about the causal relationship between their own behaviour and life events) and savings behaviour. Households with an internal locus of control tend to save more and accumulate more wealth. These findings suggest that perception of control is as important as human capital and cognitive skills in explaining wealth accumulation and portfolio allocations. The policy implications are that households with low perceptions of control would be a sensible group to target for intervention as they tend to save less and allocate less wealth to their pensions. Member behaviour: advice, savings and gender
Prof. Paul Gerrans (University of Western Australia), Prof. Noel Whiteside (University of Warwick), Dr Jimmy Feng (Monash University) and Prof. Gordon Clark (Oxford University)
Prof. Gerrans’ research on investment strategy choice in superannuation indicates most employees make few explicit decisions regarding their retirement savings trajectory, instead relying on the default superannuation fund nominated by their employer and its default investment strategy. Analysis of the Mercer administrative database shows one in six employees changed how either their savings balance or future contributions were invested, and one in 12 changed how both were invested. The research showed investment changes are more likely among men, employees with high balances, and following policy changes, with some peer group effect on investment behaviour also being observed.

Research by Prof. Whiteside and Dr Feng on the large gap between the superannuation savings of Australian men and women indicates that the super gap is larger than the pay gap (due to the effect of compound interest) and this has significant budget implications as most women rely on the age pension. One possible cause is interrupted work patterns ─ research suggests five to six years out of the workforce leads to a 17−25% lower superannuation balance at retirement. While the superannuation system assumes approximately 10% contributions from full-time work over 40 years, low superannuation balances may become more common as more employees become self-employed, work part-time and experience career breaks.
Prof. Clark’s research on advice-seeking by members of the Mercer database suggests employees are not planning agents, instead seeking advice on retirement only in response to changing circumstances ─ primarily approaching retirement age, and policy changes. The work reveals ‘stages’ in employees’ advice-seeking and provides insight for designing service-systems, currently retirement planning occurs very late and passive engagement might not be producing the best outcomes. Modelling retirement outcomes
Professor Michael Drew and Dr Adam Walk (Griffith University)
With the Superannuation Guarantee scheduled to increase to 12 per cent by 2020, Prof. Drew examined the likely impact on retirement income adequacy and whether the same gains could achieved through investment strategy alone. His research indicates increasing contributions improves retirement adequacy but also increases sequencing risk (especially when coupled with static asset allocation), and the proportion of retirees who will outlive their savings is not significantly reduced. Prof. Drew suggested that a dynamic asset allocation to manage sequencing risk exposure could achieve the same improvement in retirement adequacy without any increase in contributions.
Dr Walk examined how individuals should set expenditure levels in retirement to minimise the risk of financial ruin, and how this is affected by major health or aged-care cost. His research shows unexpected health costs which increase longevity pose the greatest risk to income stability in retirement (i.e. the greatest risk of financial ruin). Optimal withdrawal rates in retirement are highly sensitive to the timing of health costs and, to a lesser extent, to later-life aged care expenses. In discussion, the authors noted that while the risk of ruin (due to large health costs) can be mitigated using a dynamic lifecycle investment strategy, this is not a silver bullet and instead, higher contributions, insurance products and investment strategies should all be used to minimise risk. Labour market and older workers
Prof. Robert Lindley (University of Warwick) and Prof. Philip Taylor (Federation University)
Professor Lindley indicated that individuals’ decisions about retirement depend on preferences, labour market opportunities, other activities (such as caring, volunteering and leisure) and savings. He indicated that policies encouraging the employment of older workers should carefully assess the value and costs associated with them remaining in the workforce. Employers and government can both play a role in extending working lives. Employers can offer training and development opportunities, and internal mobility. Government policy can focus on changing attitudes about the value of older workers, but should ensure it does produce ‘ageist’ outcomes which penalise younger workers.
Professor Taylor echoed this point, and noted that empirical evidence highlights ageism against younger, not older workers. His work surveyed employers to gauge their reaction to the ageing workforce, particularly in light of the economic slowdown. He found employers are experiencing labour supply challenges, however, there is little evidence that older workers are suffering because of this. Panel discussion
Syd Bone (CP2), Jeremy Duffield (SuperEd), Craig Keary (AMP Capital), and Prof. Deborah Ralston (Monash University)
Mr Duffield noted that the Symposium had done an excellent job of bringing together important research relevant to the superannuation industry. He said the presentations were “interesting, insightful, innovative and intelligent.” He also suggested that many of the researchers may be willing to present their work at the offices of industry attendees, helping to build useful academic-practitioner partnerships. Prof. Ralston, leader of the CSIRO-Monash Superannuation Research Cluster, indicated that the research program is iterative and that opportunities exist to shape the research as it evolves.
Mr Bone saw great potential for expanding some of the research, for example, the model presented by Prof. Giesecke could be extended to simulate changes in taxation or other policy changes. Mr Bone indicated that Assoc. Prof. Lajbcygier and his team did a very good job of “debunking a lot of what the industry would like you to believe”, and that Dr Reeson’s presentation on withdrawal patterns raised important questions about the lump sum payout system. Mr Duffield added that research into retirement income streams had only just begun but was already revealing surprising new insights. Mr Keary added that the Cluster will play an important role in building the evidence-base behind superannuation policy. A number of the papers highlighted the lack of data available on important issues such as drawdown rates and healthcare costs in retirement.
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About the CSIRO-Monash Superannuation Research Cluster
The CSIRO-Monash Superannuation Research Cluster is a collaboration between CSIRO, Monash University, Griffith University, the University of Western Australia, the University of Warwick, and stakeholders of the retirement system in the interest of better outcomes for all. 

The Cluster Consortium 

In association with industry leading stakeholders and research partners
Superannuation Cluster industry leading stakeholders and research partners

The Cluster would also like to acknowledge the support of major industry bodies and government departments, including the Australian Institute of Superannuation Trustees (AIST), Association of Superannuation Funds of Australia (ASFA), Australian Prudential Regulation Authority (APRA), Australian Taxation Office (ATO), the Financial Services Council (FSC) and the Productive Ageing Centre, National Seniors Australia.