(Bloomberg) -- An Australian pension fund for police officers is churning its portfolio faster and using more derivatives to help manage risks from outflows, highlighting a wider challenge looming for the nation's A$2.9 trillion ($2.2 trillion) retirement savings industry.
Australia's population is aging and more people in coming years will start to draw down their savings as their working lives end, which will require pension funds to be more nimble, according to John Livanas, chief executive officer at SAS Trustee Corp., known as State Super. The fund closed to new members in 1992 and its existing savers are retired or close to retirement age.
“The world is changing as you go into negative cash flow, you really can't leave things alone,” he said in an interview. “Time in the market works for positive cash flow funds, but it doesn't for negative cash flow funds. Quite the opposite.”
The A$44 billion fund is now making changes to its portfolio about once a month, compared with the typical one or two changes it would make annually just three years ago, according to Livanas. He recently bought put-spreads to hedge against possible market weakness. The firm has also rejigged processes to allow faster decision making.
Pension funds have been dialing down forecasts for returns given that equity prices are at all-time highs. More of the Australian retirement-savings pool -- the world's fourth largest -- is also being invested in less mainstream choices such as venture capital and direct lending to companies.
Livanas said State Super's adaptations are part of a strategy focused on managing risk and liquidity in a world of low interest rates and heightened volatility, in a bid to limit the impact from the A$5 billion paid out in benefits each year. His firm has also built an algorithm to detect changes in market sentiment to help manage market swings.
“The killer for a fund in negative cash flow is high volatility,” he said. “We really worry about the downside.”
State Super, which has seen net outflows for 15 years, looks after retirement savings in defined-benefit and accumulation-style funds. Livanas and his team are more focused on risk and timing when to sell assets to pay benefits as the defined-benefit fund slowly runs out of money by 2084. The accumulation-style portion will halve in six to eight years as those who retire take their cash.
State Super's benchmark investment option lost 3% in March, besting the 6.8% drop for Australia's median fund with a similar risk profile, according to its website. The fund is up 2.2% in the year to Nov. 30, compared with the 2.1% gain by the median fund.
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