Last year almost two-thirds of superannuation contributions received by APRA-regulated funds were paid back out to members as benefits. This shift from 'stash' to 'splash' has significant ramifications for how superannuation funds define their mission.
Efforts to frame this new 'retirement outcomes' mission in legislation have failed thus far (the objectives were drafted into the Superannuation (Objective) Bill 2016, which at May 2019 still has not been passed by Parliament), but demography is writing its own law: Over 2.8 million accounts will move from the accumulation phase to the pension phase over the next decade (see Rice Warner, Retirement Won't Wait).
Whether these retirees keep their savings with their super fund, change funds, adopt a self-managed approach or move out of the system entirely will hugely influence the destiny of funds in the industry.
As funds determine their strategic response to the retirement challenge, one important decision is whether to segregate some assets into separate accumulation and pension pools or continue to combine them for scale benefits. This paper explains what asset segregation is, the key motivations for funds to consider it and why segregation is an individual fund choice. We debunk the myth that segregation is merely a question of scale and show how it relates to the broader strategic question of whether a fund sees its enterprise as one of mass production (of investment returns) or mass customisation.
Beyond the scale myth, we identify certain ways in which asset segregation decisions can end up being suboptimal, including an overreliance on the quantitative business case and the temptation to address the important question of how to implement segregation only after the decision is made rather than up front.
We also sound the alarm about an aspect of the government's imminent rules around retirement product design: If these end up being too prescriptive, funds may be forced down the asset segregation path rather than being able to determine whether it's truly the right fit for their fund.