A Perfect Mismatch: Mismatching Assets And Liabilities In Superannuation Under Member Investment Choice

Abstract

Member investment choice is being gradually adopted by the superannuation industry as a response to member demands for products more suited to their individual needs. Traditional, matched investment schemes create a significant administration burden with few remunerative benefits. This paper looks at the strategy of mismatching assets and liabilities under a member investment choice environment. An assetliability mismatch has the capacity of simplifying MIC implementation as well as providing an alternative income source to the fund and to its members. The analyses evaluate the viability of such an undertaking in practice.<br><br> The paper calculates the level of funding required to support a mismatch, simulates the return profile of the strategy, and assesses its sensitivity to any departures from the basic assumptions. Scenario testing facilitated by portfolio rebalancing is performed to evaluate and confirm the flexibility and robustness of the scheme. Critical implementation issues are also discussed, including the problem of attracting capital to support a mismatch.