RESEARCH ENGAGEMENT AND IMPACT:
CLUSTER PROGRAM
AUGUST 2014
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, TO DEVELOP A RESEARCH AGENDA THAT ESTABLISHES AN EVIDENCE BASE TO FACILITATE BETTER DECISION MAKING WITH RESPECT TO THE SUPERANNUATION AND RETIREMENT SYSTEMS IN THE INTEREST OF BETTER OUTCOMES FOR ALL
TABLE OF CONTENTS
INTRODUCTION ... 3
THE RESEARCH PROGRAM ... 4
INDUSTRY SUPPORT AND GOVERNANCE ... 5
VALUE PROPOSITION FOR INVESTORS ... 6
THE RESEARCH TEAM ... 8
RESEARCH DELIVERABLES ... 8
APPLICATION AND IMPACT OF DELIVERABLES ... 9
RESEARCH COORDINATION ... 10
RESEARCH LEADERS ... 11
RESEARCH THEMES AND POTENTIAL TOPICS ... 15
CLUSTER PROJECT 1: INFRASTRUCTURE INVESTMENT AND SUPERANNUATION ... 16
CLUSTER PROJECT 2: SUPERANNUATION: EUROPEAN COMPARATIVE PERSPECTIVES A ... 18
CLUSTER PROJECT 3: BETTER SUPERANNUATION OUTCOMES: INFORMATION, OPTIONS, AND SHORT-TERM
AND LONG-TERM MEMBER BEHAVIOUR ... 20
CLUSTER PROJECT 4: BETTER SUPERANNUATION OUTCOMES: FUND INDEXING, STYLE, AND HEDGE FUN .. 23
CLUSTER PROJECT 6: SUPERANNUATION AND THE ECONOMY: TRACKING SYSTEMIC IMPACTS ... 25
CLUSTER PROJECT 7: MODELLING RETIREMENT OUTCOMES FOR ALL AUSTRALIANS... 27
CLUSTER PROJECT 8: SUPERANNUATION: EUROPEAN COMPARATIVE PERSPECTIVES B... 29
CLUSTER PROJECT 9: POST-RETIREMENT WEALTH AND ITS EFFECT ON HEALTH AND WELLBEING ... 31
CLUSTER PROJECT 10: 60+ AS A NATIONAL ASSET – ABILITY TO CONTRIBUTE TO THE ECONOMY - LABOUR
MARKET POLICY AND FLEXIBILITY FOR OLDER WORKERS ... 35
CLUSTER PROJECT 11: QUANTITATIVE MODELLING FOR DECUMULATION PHASE: CONSTRUCTING DYNAMIC
OPTIMAL PORTFOLIOS FOR RETIREES ... 37
INTRODUCTION
The Australian superannuation industry has produced the fourth largest pool of funds under management in the world. With $1.6tn in assets under management, the size of the industry is now greater than the capitalization of the ASX, and greater than the combined deposits of all Australian banks. Total superannuation savings now exceed the size of domestic GDP, with Australia now hosting the fourth largest investment management industry globally. While the size of these funds augers well for the future of the Australian retirement system, it poses a number of questions that attract the interest of industry participants, policy makers and the wider community.
With such a large pool of funds, the allocation of super assets has the potential to drive economic development and reshape the Australian economy through contributing to the development of a corporate bond market, funding vital infrastructure, supporting innovation, and create economic growth and employment opportunities by investing in Australian business. The size of the pool of funds and the need to diversify investment means that an increased proportion of these funds will be invested in global rather than domestic markets.
Given the relative immaturity of the Australian superannuation industry the focus to this point in time has been on aspects of asset allocation and the accumulation phase. Less focus has been given to the post retirement phase and Australians over 60. A better retirement system is broader than superannuation, including pensions and private savings, but includes the need for less volatile income streams closer to retirement, and to maximize the potential benefit of the system for retirees. Post retirement literacy and financial advice, together with the need to fund better health and welfare, accommodation and transport all have a bearing on the quality of the life enjoyed by older Australians.
Over the last 18 months the CSIRO and Monash have explored these issues with a wide range of academics and industry participants, both domestically and internationally, to identify a research agenda that will help to solve some of the questions and issues emerging from this rapidly developing sector. The research direction of this initiative has two key themes:
1. SUPERANNUATION AND THE ECONOMY – THE DYNAMICS AND INTER-RELATIONSHIPS BETWEEN HOW SUPERANNUATION FUNDS ARE ALLOCATED AND THE WIDER MACRO-ECONOMY EG: WHAT IMPEDIMENTS EXIST THAT INHIBIT AN OPTIMAL ASSET ALLOCATION? WHAT ASSET ALLOCATION MAXIMIZES BENEFITS TO AUSTRALIANS?
2. HOW DO WE MAXIMIZE DECISION-MAKING FOR SUPERANNUANTS IN THE TRANSITION FROM ACCUMULATION TO POST-RETIREMENT? WHAT CAN BE DONE TO IMPROVE PARTICIPATION OF OLDER WORKERS? WHAT CAN BE DONE TO ENSURE A LESS VOLATILE INCOME STREAM AND GREATER CERTAINTY FOR RETIREES? HOW WE DEVELOP A VIABLE ANNUITIES MARKET FOR RETIREES? WHAT ARE THE HEALTH, ACCOMMODATION, INFRASTRUCTURE IMPACTS OF THE AGEING POPULATION?
These issues are not unique to Australia, indeed governments in both developed and developing countries around the world are seeking solutions to providing for retirement of an ageing population in a sustainable manner. There is much to be learnt from other jurisdictions; as a consequence, the CSIRO-Monash Cluster will be drawing on very experienced researchers from around the world to assist, in particular from University of Warwick in the United Kingdom.
THE RESEARCH PROGRAM
The research program will be both international and multidisciplinary in nature. Methodologies used in the research program will range from GE macroeconomic modelling, stochastic simulation to the latest developments in behavioural finance.
A major consideration in being able to deliver valuable research outcomes will be access to data from industry, government and regulatory databases. Forming such agreements will be a priority in establishing the research program.
Some progress has already been made in this regard, as indicated in letters of support:
Attached to this application is a letter of support from Dr Charles Littrell, Executive General Manager, Policy, Research and Statistics at APRA, indicating that APRA will make our statistical resources available to the relevant research teams, free of charge, subject to the usual confidentiality restrictions.
The Department of Human services will provide access to confidentialised unit data form their own and ATO records;
The Financial Services Council, will make industry data available;
A number of individual organisations such as Equip Super will allow access to depersonalised data; and,
One of the research projects exploring a Mercer database an agreement between Monash University and Mercer Australia. This database contains records from current and exited members over the period 2002 to 2011. This is a very rich data source which potentially yields many research benefits.
In addition to regulatory and industry data, this proposal also has the support of SIRCA, an independent and leading provider of online services to support finance and other data-intensive research at universities, Government and financial market participants world-wide. SIRCA was founded as a not-for-profit company which serves over 50 leading international universities including 32 member universities in Australia and New Zealand and over 20 from North America, Europe and Asia. SIRCA provides commercial-grade technology platforms to capture, filter, store, access, analyse and support the world’s largest integrated source of global financial market data and related news information. The data originates from over 100 stock markets, futures exchanges, commodities exchanges and other trading venues from around the world and comprises comprehensive histories of trading data and related news.
Various researchers also have access to de-identified data from regulatory agencies and government bodies such as the ATO, FACSIA, under confidentiality agreements. This data is often and publications are subject to approval.
The research program will be designed to maximize the impact of outcomes, particularly retirement outcomes from the perspective of the fund members and retirees. Embedding of researchers with industry partners, industry consultation, a knowledge transfer program, and dissemination program, which will be structured to parallel the research program, will assist with this aim.
INDUSTRY SUPPORT AND GOVERNANCE
We anticipate that we will have around $9m over three years to finance the research program. This will include Cluster funding from CSIRO of $1m per year for 3 years, matching in-kind contributions from university partners of $1 m per year, and potentially industry funding of around $1m per year from no more than 10 industry partners.
The governance structure of the Superannuation Cluster will ensure that the research agenda is industry informed and that researchers have access to the expertise, insights and possibly data from the investor group. Accordingly, investor representatives will meet annually to elect a chairman and appoint a Stakeholder Advisory Group. This Group will inform the research program and:
Meet quarterly;
Advise the Cluster Management Board on the research program;
Monitor and review progress of research programs;
Advise on funding, deliverables and impact of research activities; and
Provide input on the need to add/modify or cease activities in the light of progress and/or research outcomes. The objective of the Alliance is to drive real, beneficial changes within the industry. To this end we expect (and require) each investor to:
Make senior staff available to serve as members and sit on the board;
Make senior and technically capable staff to attend meetings and workshops; discuss and review results;
Provide data and other assistance to researchers as necessary; and,
Provide office accommodation for embedded researchers where required.
As the figure below demonstrates the creation of high impact research is an iterative process, requiring ongoing communication and dissemination across all stakeholders.
VALUE PROPOSITION FO R INVESTORS
Industry partners will invest $300k over 3 years. For this investment they will receive the benefit is a $9M research investment: a leverage ratio of 30:1. We anticipate the benefits will be greater returns for members and greater security in retirement. This will benefits members, the industry and the economy. Potential benefits of the research will include:
ENABLING A WIDER CHOICE OF ASSET CLASSES FOR INVESTMENT
Investment in illiquid or unlisted assets, such as infrastructure, is well suited to supporting the accumulation phase and retirement incomes, but is constrained by liquidity considerations. Understanding the risks and returns on infrastructure, especially unlisted infrastructure, investment in a DC environment is critical, as is understanding member investment preferences and behaviour, including switching, to determine the real level of liquidity risk in any investment portfolio. We also need to understand how best to value illiquid investments.
MAINTAINING AND STRENGTHENING THE RELATIONSHIP WITH MEMBERS
As funds consolidate and grow, and seek to contain costs, there is real value in understanding members and personalising services to members. This includes information and added value services and products. Super funds already provide disability and life assurance, but other products could be offered on a group or individual basis. By combining customer data with other data sources, such as ATO, DHS, Roy Morgan and SIRCA, we will be able to form a better understanding of member behaviour, and by applying behavioural science and psychology, we can encourage behaviour that is mutually beneficial. There are also opportunities to provide income and insurance products and maintain the relationship post retirement.
UNDERSTANDING RETIREES NEEDS
We can only tailor products and services for retirees if we know what they want and need. This includes basic needs, medical costs and aged care. Current research is somewhat limited as to the financial needs of post-retirement individuals and what is required to maintain a comfortable lifestyle, given health and accommodation costs etc. Communication is also important and an impartial evidence base will be helpful to assist in motivating retirees to make provision for later life events and also identify products and services that the industry can offer.
RESPONDING TO THE CHALLENGE OF SELF MANAGED SUPER
The self managed sector is the fastest growing and presents an opportunity for super funds and insurance companies to provide flexible products and services that will be retain members and be more attractive to those seeking a more individual approach. Again, we need to understand the motivations and take a quantitative approach, informed by data analytics, behavioural science and psychology. It is easy to say that this movement is about lower costs and control, but there are other issues to communicate such as risk and the ability to manage a portfolio in later life.
MAKING RETIREMENT INCOME AND INSURANCE PRODUCTS MORE ATTRACTIVE
Guaranteed income products require prudential reserves that can make them unattractive. With better information about retirees needs there are opportunities to offer different types of income products that don’t require the level of reserves needed by traditional annuities. And better understanding communication of the risks, again from independent, impartial analysis, can be used to influence customers and regulators to the benefit of all stakeholders.
UNDERSTANDING THE TRANSITION FROM WORK TO RETIREMENT
The industry faces a potential challenge from rule changes around retirement age and the means test for the pension. Understanding the transition by using ATO and DHS data will provide an independent, impartial evidence base for the government. Linking this with the results of other research will provide a wider, more coherent analysis of the impact of change on the whole economy.
MODELLING THE RELATIONSHIP BETWEEN PRIVATE ASSETS AND THE SAFETY NET
There is evidence from DHS that more retirees than anticipated are qualifying for a small pension and Health Card. This is causing additional administration costs in DHS and is creating some concern that the current rules are driving behaviours that were not anticipated and potentially expensive for the government. Having hard data from DHS and ATO, aids in a better understanding of the transition to provide evidence for policy makers and enable the industry to understand tax and social policy incentives and thereby anticipate trends and influence the debate. Impartial evidence and a holistic approach will increase the chance of the government taking notice.
MODELLING THE IMPACT OF SUPERANNUATION ON THE ECONOMY
In 20 years or so superannuation funds will grow from the same size as GDP to perhaps 2 or 3 times. In addition, consolidation of the sector will result in more funds with $50Bn or more to invest. We need to model the impact of super fund asset allocation as these decisions will have an impact on overall growth that, in turn, will influence overall returns. In short, superannuation will impact the economy in ways that we don’t yet understand. This understanding will enable a virtuous circle where good decisions feed back to greater growth and returns.
As the proportion of retirees in the economy increases, their spending patterns will have greater impact of the economy. There is evidence that retirees respond to uncertainty and lack of security by spending less. We need to understand and model this as this also feeds into the debate on super, tax and the safety net.
Throughout this process dissemination of the research outcomes and buy-in from key regulators and policy agencies such as Treasury, the Productivity Commission, the ATO and APRA is essential to influence policy outcomes.
THE RESEARCH TEAM
The CSIRO-Monash Superannuation Research Cluster is bringing together a team of outstanding research leaders to develop and implement the research program that will address the questions above. These include:
Prof Bernard Casey – University of Warwick
Prof Gordon Clark – Oxford University / Monash University
Prof Michael Drew – Griffith University
Prof Paul Gerrans – University of Western Australia
Prof James Giesecke – Victoria University
Prof Anthony Harris – Monash University
Prof Paul Lajbcygier – Monash University
Prof Robert Lindley – University of Warwick
Dr Barton Loechel – CSIRO
Dr Xiaolin Luo – CSIRO
Dr Claire Mason – CSIRO
Dr Andrew Reeson – CSIRO
Dr Pavel Shevchenko – CSIRO
Prof Philip Taylor – Federation University Australia
Dr Peter Toscas – CSIRO
Prof Noel Whiteside – University of Warwick
Dr Zili Zhu – CSIRO
These key researchers will lead research teams addressing issues around the topics identified, subject to approval of the governing board. A brief bio for each of these research leaders can be seen on page 11.
RESEARCH DELIVERABLES Deliverables will be in the form of:
Research papers / publications – high quality international refereed publications will inform the academic community and accessible professional pieces will also be made available and communicated widely.
Information databases – one of the critical outcomes of the research programs will be to development and application of large databases to extract both quantitative and behavioural insights.
Economic / scenario and simulation modeling and experimental methods – methods such as general equilibrium modeling of the macro-economy will develop an understanding of the interaction between key economic variables and the superannuation system;
Contributions / responses to Government enquiries – with a large body of well informed researchers capability will exit to contribute to the debate and formation of public policy outcomes;
Web site – the Super Cluster website will be a repository of information on all matters to do with the research programs, the researchers, and outcomes and will also link to other relevant sites
PhD Graduates will be trained through the research programs;
Increased capacity in CSIRO & universities re application of knowledge to super issues;
Forums and linkages to Stakeholders in the form of:
APPLICATION AND IMPA CT OF DELIVERABLES
The application and impact of these deliverables are described in the following table. Proposed output Relevant
stakeholder(s)
Practical Applications to stakeholders
Impact / Benefits to Australia
Research papers / publications
• Researchers • Advance current knowledge of Superannuation and the Economy and Australians Over 60
• A stronger evidence base to guide policy makers, industry stakeholders and regulators, better consumer knowledge Information databases • Industry
• Regulators
• Access to information as input to industry strategies,
products, plans and research
• More efficient economy as a result of better decision making by stakeholders Economic / scenario and simulation modeling and experimental methods • Government • Regulators • industry
• Model the impacts of superannuation on the Economy
•
• Better policy to enhance economic growth and wellbeing in retirement for consumers
• Product innovation Contributions /
responses to
Government enquiries
• Government • More effective design and implementation of economic and social policy relating to the themes
• Better evidence- based policy outcomes
Web site • Industry
• Regulators • Researchers
• Increase information flow and knowledge dissemination
• Better understanding across the community, more informed research and greater level of impact from outcomes PhD Graduates (from Doctoral education) • Universities • Regulators • Industry • Increased supply of
superannuation educators and researchers for academia, regulators and industry
• Skilled human capital • Opportunity for better
financial innovation and dynamic efficiency Increased expertise in
CSIRO & universities re application of knowledge to super issues • CSIRO • Universities • industry
• Quality research outcomes • Greater overall service
efficiency
• Enhance design and implementation of the superannuation system • Wider range of products
Forums and linkages to Stakeholders • Government • Regulators • Industry • Knowledge transmission • Communication
• Regulatory and industry coordination
• Wider recognition and understanding of super issues
• Greater consensus on appropriate policy
RESEARCH COORDINATIO N
The Cluster Leader will have responsibility to manage the research program to ensure that the appropriate milestones are met and to ensure maximum impact from research outcomes. The Australian Centre for Financial Studies will provide support to Monash in this regards. ACFS has extensive experience in research and stakeholder management across the financial services sector. Monash is the administering university in the ACFS consortium and Executive Director Deborah Ralston is a Professor of Finance at Monash University. Professor Ralston will be responsible for research management, dissemination activities, and regular reporting on the progress of the cluster to the Cluster Management Board and the Flagship Director.
The Cluster Leader will meet with the Cluster Management Board on a quarterly basis and on a regular basis with the Stakeholder Advisory Group.
Implementation of the Super Cluster activities has been on track and expected to continue along the lines described in the following diagram. Apart from managing the research, co-ordination and dissemination, the Cluster Leader will also be looking to the sustainability of the Cluster over time.
RESEARCH LEADERS Bernard Casey Professor and Principal Research Fellow, Institute for Employment Research. Visiting Senior Research Fellow, Hellenic Observatory, London School of Economics
Bernard has worked on employment and pension policies for much of his professional career including a senior economist at the OECD. His research into the economic implications of societal ageing has been concerned with employment in later life, work and health, transitions to retirement, employment-related social security and long-term care of the frail elderly. Bernard Casey is regularly involved in EC projects and as a consultant to governments of EU member states. His research and publications cover not only Europe, but also Japan and east Asia.
Gordon Clark,
Professor and Director Smith School of Enterprise and the Environment, Oxford University, and Sir Louis Matheson
Distinguished Visiting Professor, Monash University
Gordon research focuses on global finance and the governance of investment management in pension funds, sovereign wealth funds, and endowments. He is a Founding Governor of the UK Pension Policy Institute, and is a consultant to the Swedish Government's Buffer-fund Inquiry. He also advised The Kay Review on Equity Markets and Long-Term Decision Making. His research expertise spans superannuation, financial structure and economic development. Monash and Gordon Clark have recently entered into an agreement to access Mercer data for research purposes.
Michael Drew
Professor of Finance at Griffith University
Michael is a leader in the field of superannuation and pension fund design. He is well know for his recent work on sequencing risk and the portfolio size effect and also has several major projects on infrastructure investment. In addition to academic appointments at Griffith University (current), the ANU and QUT, Michael has held Senior Executive and Trustee Committee appointments with the Queensland Investment Corporation (QIC) Limited, QSuper, Wilson HTM, Ord Minnett and JB Were & Son.
Paul Gerrans
Professor of Finance, UWA Business School, The University of Western Australia.
Paul has received many competitive research grants including from government agencies (ARC, Productive Ageing Centre, Australian Institute of Aboriginal & Torres Strait Islander Studies) as well as industry (for example Australian Institute of Superannuation Trustees). He is widely published in retirement savings and his expertise is highlighted by appointments to the Federal Government’s Superannuation Advisory Committee (2010) and the Superannuation Roundtable (2011-present).
James Giesecke Professor and Director, Centre of Policy Studies/Impact Project Victoria University
James research interest is in the development of large-scale multi-regional and national computable general equilibrium (CGE) models, and the application of such models to the analysis of economic policies. He has twenty years of experience in commissioned research, completing over a hundred contract research project. Recent major projects include: a World Bank financed project to investigate rice market policy interventions in Vietnam (2010); and an AusAid-financed project to develop a large-scale labour market forecasting model for the Vietnam Ministry of Labour (2011).
Anthony Harris,
Director of the Centre for Health Economics, and Professor, Monash University
Anthony has held previous academic positions at the University of Aberdeen, Murdoch University and the University of Western Australia. He has been awarded numerous competitive research grants including an NHMRC funded program modeling the economics of the health care system in Australia, a macroeconomic model of the impact of an influenza epidemic, and an ARC grant on drug pricing. His most recent work has been an analysis of international drug reimbursement decision making, evaluation of cost effectiveness within clinical trials, econometric analyses of the impact of chronic disease on labour market outcomes in Australia, and the demand and supply of acute and emergency public hospital care.
Paul Lajbcygier
Associate Professor in the Department of Banking and Finance and the Department of Econometrics and Business Statistics, Monash University
Paul combines extensive industry and academic experience in investments and has provided investment advice to various funds managers, banks, and hedge funds. He has worked at both London Business School and the Stern School of Business, New York University.
Robert Lindley Founding Director, Institute for Employment Research, and
Professor of Social Studies, University of Warwick
Robert is the founding Director of the Institute for Employment Research, University of Warwick and a professor in the Faculty of Social Sciences. His principal fields of research are the labour market; the roles of education, training and knowledge production in economic development; and European integration. Included in his research is the leadership of two major multi-country studies relating to population ageing and labour market policy, funded by the European Commission: Population Ageing and the Labour Market in Europe (1997-99) and Ageing and Employment: Identification of Good Practice to Increase Job Opportunities and Maintain Older Workers in Employment (2005-06). He also took a leading role in an EU project Activating Senior Potential in Ageing Europe (2008-12). He has served on many UK and EU advisory and related bodies.
Barton Loechel, Research Scientist Science into Society, CSIRO, Brisbane.
Barton is a social scientist at CSIRO. His sociology honours investigated perceptions of risk among Australian small investors and he retains a strong interest in the sociology of financial markets. In his current role, Dr Loechel engages with stakeholders to capture their input regarding how best to position the resource industry to deal with climate change. Dr Loechel has a background in rural and regional issues and has published six peer-reviewed articles in this area, in both national and international journals.
Xiaolin Luo Principal Research Scientist
CSIRO Digital Productivity Research Flagship, Sydney
Xiaolin’s research interest and expertise include quantitative finance covering market risk, credit risk and operational risk. He has over 25 years’ scientific research and industrial consulting experience in mathematical and statistical modelling and analysis. His recent consulting and research work include developing / implementing interest rate derivative models, FX exotic option pricing methodology and software development and validation, advanced operational risk model/system development, implementation and validation; credit risk capital modeling.
Claire Mason Project Leader Science into Society, CSIRO, Brisbane.
Claire uses her background in organizational psychology and expertise in quantitative and qualitative research methods to address questions such as: How do different types of internet use relate to well-being and capability development? What are the key concerns and questions relating to the expansion of seafloor exploration and mining in Australia? What are the barriers to uptake of online services? How is welfare service delivery seen to promote social inclusion? With considerable experience in applied research with a wide range of organizations, she has published in peer reviewed journals, is a member of the editorial review board for Group and Organization Management and served as an editor for the Australian Journal of Management.
Andrew Reeson Research Scientist CSIRO Digital Productivity Research Flagship, Canberra
Andrew Reeson’s current research is focused on the service sector, and involves applying econometric modelling and behavioral economics to better understand human decision-making. He has a track record of innovative interdisciplinary research to inform policy design. Past projects include the design and implementation of environmental incentive schemes, water buybacks and a review of behavioral economics for the Henry tax review. He has 25 published papers across a broad range of topics, which have been cited over 500 times in the academic literature.
Pavel Shevchenko Senior Principal Research Scientist
CSIRO Digital Productivity Research Flagship, Sydney
Pavel leads research and commercial projects on modelling of operational and credit risks; option pricing; insurance; modelling commodities and foreign exchange; and the development of relevant numerical methods and software. He is an associate editor of the Journal of Operational Risk. Pavel has published extensively in academic journals, consults for major financial institutions and is a frequent presenter at industry and academic conferences. He is the author of the book Modelling Operational Risk Using Bayesian Inference (Springer 2011). Pavel has over 10 years experience with modelling financial risk.
Philip Taylor Professor of Human Resource Management, Federation University Australia; Honorary Professor, University of Sydney; Visiting Fellow, University of Warwick
Philip has researched and written in the field of age and the labour market for more than 20 years. He is currently leading major programs of research considering the management of ageing workforces. His interests include the management of labour supply, individual orientations to work and retirement, employers’ attitudes and practices towards older workers and international developments in public policies aimed at combating age barriers in the labour market and prolonging working life.
Peter Toscas
Research Group Leader CSIRO Digital Productivity Research Flagship, Melbourne
Peter is currently the Research Group Leader for the Algorithms and Models for Risk Analysis Group in the Business and Services Analytics Program in CSIRO Mathematical, Informatics and Statistics. Peter Toscas is a Statistician with over 17 years research experience.
Peter's background is in mathematical statistics, and he has worked in medical, environmental, and marine statistics, and in risk analysis and assessment. He is currently working in the area of spatio-temporal research for the optimal deployment of sensors and the analysis of sensor data. He is also doing research on data assimilation for short-term flood forecasting. Noel Whiteside
Professor of Comparative Public Policy, Zurich Financial Services Fellow, University of Warwick
Noel Whiteside’s research focuses on systems of governance and public accountability in historical and comparative perspective; she has specific interests in labour markets and constructions of social dependency. Recent work has focused on pensions: their governance, regulation, economic and political viability in Europe and the UK: work involving the co-ordination of an extensive network of European scholars. She has long been a consultant for Zurich Financial Services and gave invited evidence to the UK House of Lords Select Committee on Public Service and Demographic Change
RESEARCH COORDINATION
Deborah Ralston Executive Director, Australian Centre for Financial Studies, and Professor of Finance, Monash University
Deborah Ralston has extensive experience in financial studies research and in co-ordinating and managing research and dissemination programs. She is project manager of the Melbourne Mercer Global Pension Index and has research interest in fund management, performance and regulation. Deborah and ACFS will be responsible for ensuring that a program of industry engagement and research dissemination maximises the research program impact.
Zili Zhu
Research Leader in Real-Options and Financial Risk, Digital Productivity Research Flagship, CSIRO
Zili leads the CSIRO Finance and Optimal Decisions research team in developing risk analytics and innovative solutions for government services, finance, agribusiness and mining. The focus is on developing real-option evaluation methodologies for optimal decision making under uncertainty, particularly for large uncertainties with longer-term market prices. The other activities of the team are in evidence based policies, risk quantification and measurements. Zili has over 25 years of experience in delivering science solutions through innovation and technology. His career spans naval architecture, engineering, software development, and financial engineering.
CLUSTER MANAGEMENT COMMITTEE
CLUSTER LEADER CSIRO LEAD GRIFFITH
UNIVERSITY LEAD UNIVERSITY OF WESTERN AUSTRALIA LEAD UNIVERSITY OF WARWICK LEAD Prof Deborah Ralston Dr Zili Zhu Prof Michael Drew Prof Paul Gerrans Prof Robert Lindley
RESEARCH THEMES AND POTENTIAL TOPICS
1. SUPERANNUATION AND THE ECONOMY – THE DYNAMICS AND INTER-RELATIONSHIPS BETWEEN HOW SUPERANNUATION FUNDS ARE ALLOCATED AND THE WIDER MACRO-ECONOMY EG: WHAT IMPEDIMENTS EXIST THAT INHIBIT AN OPTIMAL ASSET ALLOCATION? WHAT ASSET ALLOCATION MAXIMIZES BENEFITS TO AUSTRALIANS? WHAT IS THE OPTIMAL PENSION DESIGN?
Australian infrastructure as an asset class
Determinants of public private partnership (PPP) success and failure
The predictive performance of asset pricing models on infrastructure and PPPs
Governance issues for super funds
Fund style and optimal asset allocation
More effective indexing
Exposure to alternative assets via hedge fund replication
Macroeconomic and welfare effect of linking superannuation and infrastructure in Australia
Investment in infrastructure by superannuation: impact on economic growth of Australia
Macroeconomic simulation of health expenditures of the elderly and their impact on industry and the economy in Australia 2014-2044
The VU-S Model – tracking superannuation impacts on real national wealth
Superannuation and macroeconomic growth and stability
Superannuation and the allocative efficiency of capital supply
2. THE TRANSITION AND POST RETIREMENT PHASE – AUSTRALIANS OVER 60. HOW DO WE MAXIMIZE DECISION-MAKING FOR SUPERANNUANTS IN THE TRANSITION FROM ACCUMULATION TO POST-RETIREMENT? WHAT CAN BE DONE TO IMPROVE PARTICIPATION OF OLDER WORKERS? WHAT CAN BE DONE TO ENSURE A LESS VOLATILE INCOME STREAM AND GREATER CERTAINTY FOR RETIREES? WHAT ARE THE HEALTH, ACCOMMODATION, INFRASTRUCTURE IMPACTS OF THE AGEING POPULATION?
Investment strategies for managing retirement risk over the life course
Retirement, pension and superannuation outcomes for indigenous Australians
Gender issues in funded pension systems
Member switching and behavior
Annuities and other non-volatile income streams
Wellbeing effects of retirement and the mediating role of income
Financial aspects of later-life medical and aged care expenses
Wealth fluctuations and the health of retirees
Health expenditure by the elderly
Ageism and the social construction of older workers
Gender and age
Accommodation of workers with particular chronic conditions
New patterns of retirement and later-life employment
Employers as ‘social policy actors’
CLUSTER PROJECT 1: INFRASTRUCTURE INVESTMENT AND SUPERANNUAT ION Principal Researcher: Professor Michael E. Drew (Griffith University)
Research Team: Associate Professor Robert J. Bianchi (Cluster Project Leader, Griffith University), Dr Adam N. Walk (Griffith University), Associate Professor Jason West (Griffith University)
PROJECT OVERVIEW:
The underlying design feature of this Cluster Project considers infrastructure as one of numerous asset classes in which superannuation funds can invest to explore the asset class and portfolio characteristics of this key investment exposure. The Cluster Project also explores lessons from PPPs to provide insights into structuring future infrastructure investments.
The Cluster Project contains three sub-projects:
1. THE PREDICTIVE PERFORMANCE OF ASSET PRICING MODELS ON INFRASTRUCTURE AND PPPS
Recent studies such as Simin (2008) suggest that conditional and unconditional asset pricing models in the U.S. cannot outperform the predictability of a constant fixed rate return benchmark. This has important implications in attracting finance to infrastructure and PPPs as practitioners desire an asset pricing model that provides accurate expectations of future returns. We consider this issue by examining the predictability of various asset pricing models in the Australian setting. More specifically, we evaluate the predictive performance of asset pricing models on Australian infrastructure and PPP returns. The best performing asset pricing model from this study will benefit both finance professionals and governments in being able to manage market expectations on the required rate of return for important infrastructure projects in Australia in the future.
2. INFRASTRUCTURE AS AN ASSET CLASS (GLOBAL AND AUSTRALIA)
Empirical research has not kept pace with the growing demand for infrastructure investments in Australia and around the world (Dechant et al, 2010; Martin, 2010; Newell and Peng, 2008). Superannuation and pension funds are targeted as the likely source of long-term finance for these investments, however, these investors have little knowledge on the investment merits of infrastructure over the long-term. This issue becomes problematic for long-term investors in Australia as the oldest infrastructure index in this country commenced in 1995 (Bird, Liem and Thorp, 2012). Some research suggests that infrastructure is an asset class (Idzorek and Armstrong, 2009; Newell and Peng, 2008) while others argue that infrastructure is a sub-sector of equities (Howard et al, 2012). To address these issues, this paper aims to map the return and risk characteristics of Australian and global infrastructure to well recognised systematic risk factors which allow us to reconstruct infrastructure returns over the long-term. This new knowledge will allow superannuation funds to make better investment decisions and provides governments with better policymaking decision tools in relation to the viability of various infrastructure projects and investments.
3. DETERMINANTS OF LISTED INFRASTRUCTURE SUCCESS AND FAILURE
In a post-GFC world, governments face a tide of fiscal budget austerity, yet there is an ever-increasing demand for new infrastructure investment in Australia and around the world. At present, the private sector is encouraged to invest in infrastructure assets, which allows government to reallocate scarce resources towards the provision of other essential services (Giorno 2011). Despite the wide acceptance of the desirability of infrastructure assets within a portfolio, there
PROJECT OBJECTIVES:
1. To evaluate the predictive power of asset pricing models on infrastructure and PPP returns. 2. To examine whether infrastructure is an asset class or a sub-set of equities.
3. To identify the determinants of success (and failure) of listed infrastructure investments.
PROJECT OUTCOMES:
31/12/2013 - Working paper on "The Predictive Performance of Asset Pricing Models on Infrastructure and PPPs" completed.
30/06/2014 - Working paper on “The Predictive Performance of Asset Pricing Models on Infrastructure and PPPs” submitted for publication.
31/12/2014 - Working paper on “Infrastructure as an Asset Class (Global and Australia)” completed.
30/06/2015 - Working paper on “Infrastructure as an Asset Class (Global and Australia)” submitted for publication.
31/12/2015 - Working paper on “Determinants of Listed Infrastructure Success and Failure” completed.
30/06/2016 - Working paper on “Determinants of Listed Infrastructure Success and Failure” submitted for publication.
IMPACT SCOPE:
The “Infrastructure Investment and Superannuation” project will deliver a minimum of three scholarly publications over the three year research timeframe. Research transfer from the project will formalize the investment characteristics of Australian infrastructure as an asset class, of particular interest to large superannuation investors. Moreover, the research and will provide learnings from previous PPP transactions to provide all stakeholders with improved understanding of the mechanics of these transactions. Finally, the research will explore the drivers of Australian infrastructure returns and PPPs to price future projects, leading to improved efficiency of capital deployment.
CLUSTER PROJECT 2: SUPERANNUATION: EUROP EAN COMPARATIVE PERSPECTIVES A Principal Researcher: Professor Bernard Casey (University of Warwick)
Research Team: Professor Noel Whiteside; and the Warwick team has established an extensive network of European scholars working on pensions and pension finance whose research findings would inform the analytical papers proposed below.
PROJECT OVERVIEW:
Following the crisis of 2008 and its consequences for the Eurozone, pension funds have been employed to meet varied financial exigencies in European states: their use to safeguard public finances or stimulate economic recovery has been widely discussed. While the Australian economy avoided the worst of the crisis, analysis of European debates offer salutary pointers about problems that arise when political demands are placed on the shoulders of market agents in unexpected ways. Research under this cluster project addresses the various compromises achieved between market agents and the public interest. What can be learned from European experience? Where are the success stories to be found – and what factors contributed to positive outcomes?
The project consists of two research sub-projects to offer international comparative perspectives for the Monash-CSIRO research agenda.
1. GOVERNANCE AND POLICY ISSUES FOR SUPER FUNDS
Who has ultimate authority over market-based pension systems provokes dispute. Volatile returns (uncertain outcomes) or distribution problems can create demands for political intervention that threaten professional risk management or fail to respect actuarial fairness. Leaving everything to market forces can raise administrative costs and risks sub-optimal decision-making by individuals with poor financial literacy. Leaving pension governance to politicians invites political opportunism that may undermine financial viability. Both sides create principal / agent problems that privilege insiders. Governance must address issues arising from market risk and from political risk, secure impartial financial information and guarantee consumer protection.
Research will review how these problems are addressed in those EU member states where mandatory or quasi-mandatory DC pension schemes complement state schemes - as in Australia (Nordic and CEE countries as well as the UK), to analyze the comparative performance of different systems of co-ordination under these public-private partnerships. Specific attention will be paid to policy issues that have provoked (and continue to provoke) debates relevant to the Australian situation such as outcome guarantees, how management charges may be contained, how persistence and lost accounts can be managed, how financial advice can be provided etc.
2. PENSION FUNDS INVESTMENT IN INFRASTRUCTURE: SOME EUROPEAN EXPERIENCES
This research will analyse the importance of infrastructure investments in European pension funds’ investment portfolios, drawing on examples from the United Kingdom, the Netherlands, the Scandinavian countries, Italy, Poland and Croatia. Inter alia, it will illustrate the differences in behaviour of defined benefit plans and defined contribution plans, seek to explain them and consider the difficulties the latter might encounter if they, too, seek to make such investments. Attention will be paid to governance issues concerning asset valuation, the role of intermediaries (advisers and fund managers), and to the way in which regulatory risk is assessed.
PROJECT OUTCOMES:
31/12/2014 Working paper on ‘Governance and funded pensions’ completed
31/12/2014 Working Paper Pension Funds Investment In Infrastructure: Some European Experiences
30/06/2015 Submitted for publication Pension Funds Investment In Infrastructure: Some European Experiences
30/06/2015 Paper on ‘Governance and funded pensions’ submitted for publication
IMPACT SCOPE:
In addition to the published articles in international academic journals outlined above, Warwick will offer summative policy briefings for CSIRO and other end users that highlight the main outcomes of research under this project pertinent to Australian debates. Warwick researchers’ previous engagements with comparative pension analysis (at the OECD: on EC-funded research projects) gives them privileged access to pension expertise across EU member states that may be used for the purposes of the CSIRO-Monash project in broader ways than those outlined above.
CLUSTER PROJECT 3: B ETTER SUPERANNUATION OUTCOMES: INFORMATION, OPTIONS, AND SHORT-TERM AND LONG-SHORT-TERM MEMBER BEHAVIOUR
Principal Researcher: Professor Gordon Clark (Monash University and University Of Oxford)
Research Team: Prof Paul Gerrans, (UWA), And The Monash Funds Management Research Cluster including Dr Huu Duong, Prof Paul Lajbcygier, Dr Carly Moulang, Dr Maria Strydom, Dr John Vaz, Dr Jayasinghe Wickramanayake, in collaboration With Prof Noel Whiteside (University of Warwick)
PROJECT OVERVIEW:
A key element in the structure and performance of Australia’s superannuation system concerns the nature and scope of member behaviour as regards the choice of savings options and investment vehicles, and their response to changing personal circumstances and financial markets. Many participants in superannuation plans give-over responsibility for making such choices to the sponsoring institution (the employer, the superfund, etc.). Notwithstanding the significance of ‘passive’ participation in the Australian superannuation system, little is known about the behavioural histories of superannuation plan members over the short, medium, and longer terms. Notwithstanding commentary in the media about under- and over-reactions of superannuation plan members to changing macroeconomic and financial market circumstances, academic research has found it difficult to situate observed behaviour in the context of members’ longer term behaviour. This cluster project seeks to better understand patterns of active versus passive behaviour, short-term and longer term behaviour, and the responses of members to events as well as advice given by the superannuation fund.
Research projects related to this cluster project of work are grouped under four headings. 1. HETEROGENEITY OF BEHAVIOUR
Including the description of active and passive behaviour by socio demographic characteristics, including age, gender, income, and place of residence distinguishing between members according to their risk appetite, risk-taking and risk aversion. Our goal here is to determine whether meaningful groups of superannuation plan participants can be produced, paying particular attention to passive and active behaviour over the short-term and longer term. As well, consideration will be given to whether some groups of superannuation plan participants, by reason of their actions or non-actions are better able to accumulate pension savings for retirement. In this regard, the savings behavior of women of child-bearing and child-caring age is of specific interest and analysis will focus on the discrepancies between male and female pension saving rates, found not only in Australia but across Europe as well.
2. TRIGGERS OF MEMBER BEHAVIOUR
Projects under this heading are concerned with identifying whether there are ‘triggers’ that prompt superannuation members to switch from passive to active or active to passive, including changes in their asset allocations, investment vehicles, and risk profiles. Here, we seek to determine whether there are macroeconomic and/or financial market factors that trigger changes in status and options, whether triggers are more often than not idiosyncratic rather than system-wide, and whether seeking advice from superannuation funds dampens or amplifies patterns of behaviour. Also included in our analysis will be consideration of the impact of changes in Australian public policy as regards the taxation of superannuation contributions and benefits as well as consideration of changes in the options provided to superannuation plan members.
value when considered over both the short-term and longer term? And, importantly, is there any evidence of skill in switching behaviour as against luck and happenstance? In part, these questions are framed with respect to the wider social debate about whether the voluntary exercise of the right to change asset allocations is consistent with long-term individual and collective welfare. In part, these questions are also framed with respect to the debate in the academic literature about the costs and consequences of choice in the context of risk and uncertainty.
4. WHO WINS?
When considered over the past decade, what types of people (superannuation members) were more successful than others (comparing across socio demographic groups) in sustaining the long-term accumulation of retirement assets? Is there a bias in relative success towards those that began with relatively high account balances and those that maintained those balances by a mode of behaviour that reinforced the cumulative rate of return on account balances? More specifically, does a long-term behavioural perspective from a relatively privileged position reinforce retirement security and does this explain gender differences in retirement savings? Over the decade for which we have data, we focus upon the apparent differences between cohorts, between men and women, between those well-paid and those less well paid, and those with continuous employment as opposed to those with variable and discontinuous employment.
PROJECT OBJECTIVES:
1. To investigate member superannuation outcomes resulting from differences amongst information sources for individuals making superannuation related decisions.
2. To investigate member switching behaviour over the long term in order to better understand sub-optimal individual decision making about superannuation investments.
RESOURCES AND DATA:
This particular cluster project relies upon a large, comprehensive database on member behaviour for the period 2002 – 2012 provided by Mercer (Australia). This data is organised such that participants can be followed through the entire period if they remain enrolled in one of the sub-funds provided by Mercer. In the first instance, this is an administrative database that records all changes to a member’s file including the inflow of contributions, the allocation of costs, etc. In the second instance, however, it has been organised so as to allow for the analysis of members’ behaviour by following them over time. By agreement, individual members cannot be identified. Also by agreement, the constituent funds remain anonymous.
The agreement governing use of the data was put in place in 2012 – 2013. In this respect, access to and use of the data is restricted to Monash University and Prof Paul Gerrans at the University of Western Australia. As well, access to and use of the data for specific research projects must be approved by Monash University through a data usage and communications committee, which was established for the purpose of ensuring that the data is accessed in use in accordance with the agreement between Monash University and Mercer. If approval is granted, researchers are required to sign a statement agreeing to the relevant conditions prior to any access or use of the data. Before any publication or presentation of research using the Mercer data, Mercer will be provided with a copy of the paper, publication, PPT, or abstract for review. There is a requirement for regular reporting to Mercer on the use of the data. Over the second half of 2013, considerable effort was devoted to improving the quality of the data, the coherence of the database, and identifying any systemic problems or issues to be resolved in compiling the data for research purposes. Since the success of the project depends upon the data, priority was given to building up participants’ histories such that their behaviour can be observed and measured over the short-term through to the longer term. While there are many hundreds of thousands of participants in the database, it is apparent that due to job switching,
labour market turnover, and changing individual circumstances the number of participants that ‘survived’ the entire period is far fewer than the total number of recorded participants summed over the entire period.
PROJECT OUTCOMES:
February 2014: Lessons from the HILDA data base for modelling behaviour
December 2014: Presentation ‘Gender Issues in Australian Super’ for Cluster meeting
March 2015: Working paper ‘Gender Issues in Australian Super’ completed
December 2015: Publication - Gender and Funded Pensions: Policy Implications - submitted for publication [The research will also be presented at conferences, seminars and workshops as the opportunity arises]
CLUSTER PROJECT 4: BETTER SUPERANNUATION OUTCOMES: FUND IND EXING, STYLE, AND HE DGE FUNDS
Principal Researchers: Associate Professor Paul Lajbcygier (Monash University)
Research Team: Dr Jason Choo, Rohan Fletcher, and the Monash University Funds Management Research Cluster
PROJECT OVERVIEW:
This Cluster Project aims to maximise retirement outcomes for the superannuant and comprises three sub-projects. 1. MORE EFFECTIVE INDEXING
Today most superannuation funds are allocated to index funds for good reason. Index funds outperform most active funds, in most styles, most of the time. They provide broad market exposure with low cost, resulting in superior long– run performance. Recently, it has been noted that index funds are subject to a ‘structural drag’ whereby they consistently overweight stocks that are overvalued and underweight stocks that are undervalued Once way to combat this flaw, is to consider new ‘enhanced’ index alternatives, known as Market Valuation Indifferent strategies. Here, the market value of a stock is ignored in the weighting process. We explore the costs and benefits of various enhanced indexing and examine strategies to reduce the costs associated with them.
2. FUND STYLE AND OPTIMAL ASSET ALLOCATION
When choosing a fund manager a plethora of investment options are available to the individual. However, it is unclear what retirement outcomes such options will yield. Investment style is a widely used to help investors make this choice. The style of a fund drives the choice of risk factors that determine the returns of a fund. Investors will form expectations of returns and risk based on the style and in so doing will use fund styles as the basis for performance measurement and manager compensation. Serious problems arise for the investors when funds are styled incorrectly. Misclassification occurs when a fund deviates from the advertised style without disclosing the change in investment behavior to investors. When misclassification occurs, the investor’s reasons and objectives for buying the mutual fund are derailed. Effectively incorrect style is an impediment to an optimal asset allocation. Studies have put the levels of mutual fund misclassification as high as 31%. Managers have incentives to mis-classify themselves: Fund managers throw out poor performers and or change the apparent strategy of the fund at the end-of-period to improve their relative historical rankings and increase fees through growth in assets under management. Such behavior has led to the demand for classification that is independent of the originating fund manager and preferably based on past returns. In this project we offer new techniques to help guide investors in their choice of fund by developing better style measures than can guide fund choice more accurately and reduce the impediments to optimal asset allocation.
3. EXPOSURE TO ALTERNATIVE ASSETS VIA HEDGE FUND REPLICATION
In the search for enhanced yield many superannuation funds have increased their exposure to alternative assets. More than a 20% allocation to alternative assets (like hedge funds) is not uncommon. Hedge funds are in many ways the antitheses of passive investment approaches: they charge huge fees; they are not transparent; it is unclear if, on average, they value add; many transact often and ‘churn’ their portfolios. So, why not pool managers into styles with similar risk exposures, estimate the risk exposures and replicate their returns in aggregate? The attraction of this idea is that such passive replication would permit the reduction of hedge fund fees to much lower levels. In this way, investors would ultimately be better served. We explore non-linear hedge fund cloning for various hedge fund styles .
PROJECT OBJECTIVES:
1. To develop measures of fund style to guide fund choice more accurately and reduce the impediments to optimal asset allocation.
1. To explore the costs and benefits of various enhanced indexing and examine strategies to reduce the costs associated with them.
2. To explore non-linear hedge fund cloning for various hedge fund styles. PROJECT OUTCOMES:
31 August 2013: Working paper on More Effective Indexing completed.
31 January 2014: Paper on More Effective Indexing submitted for publication.
31 March 2014: Working paper on Fund Style and Optimal Asset Allocation completed.
31 March 2014: Working Paper on Exposure to Alternative Assets Via Hedge Fund Replication completed.
31 December 2014: Paper on Working paper on Fund Style and Optimal Asset Allocation submitted for publication.
31 December 2014: Paper on Exposure to Alternative Assets Via Hedge Fund Replication submitted for publication.
IMPACT SCOPE:
The “Superannuation and the Economy” stream from Monash University is focused on projects that will maximize retirement outcomes for the superannuant. It will deliver various scholarly publications over the three year research timeframe. It will provide insight about superannuant behavior to industry such as Mercers, explore alternatives to traditional indexing for funds managers (such as Vanguard or VFMC) and consider how to better measure and report fund style to investors.
CLUSTER PROJECT 6: S UPERANNUATION AND THE ECONOMY : TRACKING SYSTEMIC IMPACTS Principal Researcher: Professor James Giesecke (Centre of Policy Studies/Impact Project, Victoria University) Research Team: Dr Janine Dixon, Dr Xiujian Peng and Dr Nhi Hoang Tran (Centre of Policy Studies/Impact Project) PROJECT OVERVIEW:
The project aims to support better policy making around superannuation by providing a better understanding of the impacts of policy changes on the Australian economy.
There are three sub-projects in this Cluster Project:
1. THE VU-S MODEL – TRACKING SUPERANNUATION IMPACTS ON REAL NATIONAL WEALTH
The first sub-project will complement elements of other projects in the Superannuation Flagship Cluster by providing a platform within which to explore the economy-wide impacts of policy issues and recommendations emerging from these streams. VU-S is the extended model of Victoria University’s large-scale multisectoral model of the national economy. Some of the other Cluster projects investigate infrastructure investments and superannuation, which have the potential to inform inputs to the VU-S model relating to both the volume and price of capital supply to a variety of infrastructure assets. One output of the VU-S model will be tracking real national wealth under alternative superannuation policy and economic development assumptions.
2. SUPERANNUATION AND MACROECONOMIC GROWTH AND STABILITY
The second sub-project will examine how design features of the current superannuation system, and proposed policy changes, will affect macroeconomic stability. The superannuation system may contribute stability to both the nation’s domestic savings flow and the allocation of this flow to industry-specific capital formation. Second, there is evidence that compulsory superannuation has generated a net increase in household savings and wealth. This has implications for the level of economic activity.
3. SUPERANNUATION AND THE ALLOCATIVE EFFICIENCY OF CAPITAL SUPPLY
The third sub-project will use the VU-S model to explore the macroeconomic effects of the superannuation system as presently configured, and also investigate the economy-wide effects of policy proposals to change the system. The latter will be important in complementing the Cluster’s other research projects. Like the MONASH model, VU-S will be year-on-year dynamic, with simulations extending over long time periods. This will elucidate how the superannuation system influences the allocation of capital under alternative assumptions for the forecast path of the Australian economy. Projections with VU style models embody a large amount of detail on forecast changes in industry production technologies, household tastes, government policy variables, and the international trading environment. By varying the forecast changes in these structural and policy variables, it will be possible to construct a number of plausible alternative forecasts for the development of the Australian economy. VU-S can be used to examine the superannuation system’s capacity to effectively channel savings under these alternative forecast growth paths.
PROJECT OBJECTIVES:
1. To use the VU-S model to explore the economy-wide impacts of selected issues and policy recommendations emerging from other research projects in the Superannuation Flagship Cluster.
1.1. To use the VU-S model to track real national wealth under alternative superannuation policy and economic development assumptions.
2. To examine how design features of the current superannuation system, and proposed policy changes, will affect macroeconomic stability.
3. To examine the superannuation system’s roles in mediating the domestic savings flow and managing the stock of superannuation assets.
PROJECT OUTCOMES:
31 Mar, 2015: Working paper on The VU-S Model – Tracking Superannuation Impacts on Real National Wealth completed.
31 Mar, 2015: Working paper on Superannuation and Macroeconomic Growth and Stability completed.
31 Mar, 2015: Working paper on Superannuation and the Allocative Efficiency of Capital Supply completed.
31 Mar, 2016: Paper on The VU-S Model – Tracking Superannuation Impacts on Real National Wealth submitted for publication.
31 Mar, 2016: Paper on Superannuation and Macroeconomic Growth and Stability submitted for publication.
31 Dec, 2016: Paper on Superannuation and the Allocative Efficiency of Capital Supply submitted for publication.
IMPACT SCOPE:
The research is motivated by the scale of the sector’s activity in mediating the nation’s savings/investment flows. With $1.4tn under management, and annual inflows of over $100bn, both the sector itself, and policy changes that affect the sector, will have sizeable impacts on the Australian economy. The project aims to inform policy makers by evaluating these impacts and demonstrating the economic benefits of good policy design. Research transfer will be achieved through both workshops with public policy stakeholders, and a training course in the VU-S model designed to equip public policy economists with a formal and quantitative understanding of the role of the superannuation sector within an economy-wide context. Documentation and wider dissemination of research findings will be achieved through working papers, conference papers, and submissions to refereed academic journals.
CLUSTER PROJECT 7: M ODELLING RETIREMENT OUTCOMES FOR ALL AUS TRALIANS Principal Researcher: Professor Michael E. Drew (Cluster Project Leader, Griffith University)
Research Team: Associate Professor Robert J. Bianchi (Griffith University), Dr Adam N. Walk (Griffith University), Associate Professor Jason West (Griffith University)
PROJECT OVERVIEW:
This Cluster Project considers the superannuation journey across the life course, from the accumulation phase, to conversion and the decumulation/distribution phase. The research design of this project is outcome-oriented, emphasizing the contrasting experiences of different age groups, dynamic risks and cohort outcomes. There are three sub-projects:
1. INVESTMENT STRATEGIES FOR MANAGING RETIREMENT RISK:
The global financial crisis (GFC) exposed severe deficiencies in most extant investment strategies. Principal amongst these deficiencies was the inability of investment strategies to manage the interplay between the portfolio size effect (Basu and Drew, 2009) and sequencing risk (Macqueen and Milevsky, 2009; Doran, Drew and Walk, 2012). While recent research has focussed on improving long horizon investment strategies (Basu, Byrne and Drew, 2011; Bianchi, Drew and Walk, 2013), these studies remain overwhelmingly focussed on the accumulation phase of the life course in a US context. Given recent regulatory moves in Australia aimed at improving superannuation (Cooper reforms), this paper will investigate a range of investment strategies and study their ability to achieve retirement adequacy in an Australian context.
2. FINANCIAL ASPECTS OF LATER-LIFE MEDICAL AND AGED CARE EXPENSES:
Investment managers typically view the investment decision from an asset-only perspective, attempting to maximise risk-adjusted return. Pension finance scholars and actuaries are more likely to take a holistic view, considering both the asset and liability sides of the financial planning problem. As advancements in medicine and associated technologies continue to extend life expectancies, two particular “liabilities” loom large in the mind of scholars, policy analysts and retirees: later life medical expenses, and the costs associated with aged care. This paper will consider whether the scale and/or timing of these two particular expenses, affects the optimal investment strategy throughout the life course.
3. RETIREMENT, PENSION AND SUPERANNUATION OUTCOMES FOR INDIGENOUS AUSTRALIANS:
A key feature of superannuation plan design is the assumption that members have long and continuous periods of employment over which contributions are made (Basu and Drew, 2009). This heroic design feature has led to debate on the adequacy of retirement outcomes for those with little or interrupted employment, particularly the adverse impacts this has on Indigenous Australians. This paper would employ non-parametric stochastic simulation to investigate retirement outcomes as well as exploring issues of pension inequality due to shorter life expectancies.
PROJECT OBJECTIVES:
1. Investigate various default option designs in superannuation that manage retirement risk and study their ability to achieve retirement adequacy in an Australian context.
2. Investigate financial aspects of later-life medical and aged care expenses.
3. Investigate retirement, pension and superannuation outcomes for Indigenous Australians. PROJECT OUTCOMES:
