Breaking the Retirement Solutions Impasse
“Super funds will need to innovate to find good retirement solutions as large numbers of members move into the pension phase,” said Raewyn Williams, Director of Parametric’s Research & After-Tax Solutions.
“The industry is in a ‘scale versus segregation impasse’.” said Ms Williams. “Traditionally super funds pooled their accumulation and pension assets to take advantage of economies of scale but the rapid growth of pension assets is making it harder to ignore more customised pension solutions just to preserve scale benefits.”
“Most funds believe they would have to sacrifice economies of scale benefits to segregate assets into two separate accumulation and pension pools, and then design targeted solutions for each.”
A recent Parametric research paper by Ms Williams, ‘Scale versus Segregation: Breaking through the Retirement Solution Impasse’ explores the efficiency of the U.S. established Centralised Portfolio Management (CPM) approach for an existing multi-manager equities portfolio without the tax and implementation frictions.
“The standard thinking about segregation is that you have to carve out each separate mandate and create new mandates, potentially with new managers, because you want something slightly different. So you could end potentially up with double the mandates and relationships with managers.”
“Our experience with CPM shows that you can implement active manager positions in a centrally coordinated way by taking a daily data feed of a complete set of active manager recommendations (hypothetical positions which are not cash-backed) and creating a single real, cash-backed equities portfolio.”
“With ‘pension CPM’, the accumulation mandates become the template for a single pension CPM portfolio, but a fund can tailor the solution for pension objectives within the CPM portfolio, without changing the existing accumulation mandates.”
Ms Williams said that a ‘pension CPM’ solution of this kind would avoid many of the drawbacks of the standard approach to segregation.
“It avoids the multiplication of managers and strategies within the fund’s equities allocation,” she said. “It is designed to allow the fund to retain its relationships – and scale - with existing managers, leaving the managers’ strategies untouched, with the ability to modify the investment strategy for pension members within the CPM portfolio itself.”
“Using CPM to solve equity funds' pension phase problem seems to be a way to maintain the scale benefits of existing arrangements as well as seek to provide a custom solution targeting the needs and objectives of pension members.”
“You still have the relationships with the existing managers and the scale that underpins those relationships,” Williams said.
A single separate pension portfolio of this type, created through the use of CPM, would also meet the strict segregation requirements of the Australian Taxation Office and would qualify for a tax exemption for income and gains earned on these segregated current pension assets.
“Because the CPM pension portfolio would meet the requirements for segregation, the fund could use the segregated current pension assets tax exemption for the CPM pension portfolio.”
“Different 'flavours' of segregation are also possible where the fund is willing to be innovative,” said Ms Williams. “’Pension CPM' could be a way for funds to 'have their cake and eat it too'.”
Ms Williams said that the CPM strategy seeks to maximise wealth for super fund members by focusing on after-tax outcomes and implementation efficiency.
“Even in the post-retirement phase, clever thinking about after-tax returns and implementation efficiency can still produce savings” she said.
The Seattle-based Parametric has over 20 years of experience offering tax-managed investment solutions to U.S. investors. Since 2012 Parametric has been working with Australian investors to explore ways to trade more effectively and efficiently.
Parametric Portfolio Associates LLC (“Parametric”), headquartered in the United States in Seattle, Washington, with Australian offices at MLC Centre, Suite 6502, 19-29 Martin Place, Sydney NSW 2000, is registered as an investment adviser under the United States Securities and Exchange Commission Investment Advisers Act of 1940. Parametric is exempt from the requirement to hold an Australian financial services license under the Australian Corporations Act 2001 (Cth) (Corporations Act) in respect of the provision of financial services to wholesale clients as defined in the Corporations Act and the Australian Securities and Investments Commission's (“ASIC”) Class Order 03/1100. SEC rules and regulations may differ from Australian law. Parametric is not a licensed tax agent or advisor in Australia and this does not represent tax advice. With over $136 billion USD of assets under management as of 31 December 2014, Parametric is a global asset management firm offering investors a variety of portfolio solutions, including after-tax equity (performance measurement and indexed portfolio management), centralised portfolio management and systematic active strategies. Parametric is a majority-owned subsidiary of Eaton Vance Corp., one of the world’s most dynamic global asset management companies.