Improving member outcomes and Heatmap – Metrics for Pension phase?

MySuper product heatmap is a major enhancement to industry transparency. However, MySuper only covers the accumulation phase of superannuation. How would / should a heatmap / metrics for pension phase products look like? It’s worth considering this question in the context of account-based pension products given its prevalence.

Using the metric “Net Investment Return (NIR) p.a.” under the MySuper heatmap metric as an example, what equivalent metric would be relevant and meaningful for account-based pension products?

The possibilities are endless but the last thing I would want to see is to use the same metric/methodology and then simply replacing MySuper product investment returns with account-based pension investment returns in the calculation.

Why? Because the NIR is calculated as a time-weight return. Time-weighted returns are widely used as they enable a fair comparison across investment managers and between an investment manager and the benchmark as they remove the impact of cash flows when calculating the return (which the manager has no control of) – so it is not unreasonable to remove that effect when evaluating/comparing the performance of investment managers.

However, things are different in the pension/decumulation phase – especially through the lens of member outcomes in the context of members in account-based pension products. I would argue that the NIR metric should be calculated as a money-weighted return.

A money-weighted return is a more meaningful metric that reflects the impact of members drawing down income payments from these products and it may help to shift the investment focus from the perspective of investment managers/Accumulation phase to the perspective of Pension/decumulation phase.

Of course, this approach is not without difficulties and challenges. For example, what would be a suitable standardised cash flow drawdown pattern for the purpose calculating the money-weighted return metric?

• The legislated minimum drawdown rates?
• Constant dollar drawdown?
• Others?

The first two options are plausible as empirical evidence suggests that they reflect the actual drawdown behaviour of retirees. However, it must be noted that they represent different income experience over time with one being variable (subject to investment experience) and another being constant.

Digging a bit deeper, if the legislated minimum drawdown rates are used, a few interesting issues emerge:

• Does that mean the metric needs to be calculated separately for different age groups given that the minimum drawdown rate varies with age?
• Does that mean the income payments (from the same starting representation balance) need to be disclosed given that the income payments are affected by investment returns? If so, is there a need to also disclosure the average income level and/or average income variation from year to year?

If a constant dollar drawdown approach is used, what should the amount be? Again, the appropriate figure is likely to depend on the size of the balance and the age of the representative member.

There are no easy answers. It would be interesting to see how APRA’s heatmap evolves over time and when it will be finally developed/applied for pension products.