One super fund has decided to buck the age-based trend.

The nation's biggest superannuation fund, AustralianSuper, has just made what Yes Minister's Sir Humphrey Appleby would call "a brave decision".

The fund has decided to retain its balanced default option - with about 75 per cent of its investments in shares and growth assets - when the trend is to switch to lower-risk age-based defaults in the lead-up to retirement.

Braver still, it is making the balanced option the default for its pension product until members reach 75, when their growth assets will be scaled back to 50 per cent.

Members' super contributions are invested in a fund's default option if they don't select an alternative. Despite having a choice of 16 options, 87.5 per cent of AustralianSuper's pre-retirement members and 31 per cent of pension members hold all or part of their investment in the balanced option.

"The single most important decision a fund manager makes is the construction of their default option," says the chief executive of AustralianSuper, Ian Silk.

He says the fund decided to review its default option in light of the trend towards age-based default funds in Australia, widespread disenchantment with super and falling account balances in the aftermath of the recent market turmoil.

The balanced default option has about 75 per cent of its funds in growth assets and 25 per cent in more conservative fixed interest and cash.

Age-based and target-date funds typically offer an aggressive asset allocation mix of up to 90 per cent for younger members but begin to reduce exposure to shares and property once they turn 50.

Silk says he and his directors expected to adopt an age-based default following the review. "[Instead] we came to a point we didn't expect to come to, that is that a simple balanced option is better for most people until 75," he says. "Given that the average male lives to 86 and the average female to 90, there are many decades when you will be dependent on retirement income. When you retire you don't want your savings to retire, you want them to keep working."

Modelling done for AustralianSuper by asset consultants Watson Wyatt (now Towers Watson) indicate age-based and target funds result in people de-risking too early.

"We started with a clean sheet of paper to look for the most appropriate default for Australian conditions, making allowances for the effect of a means-tested age pension," says David McNeice of Towers Watson.

They found maximising returns during the accumulation phase and in early retirement creates a solvency buffer during retirement that will help members withstand short-term losses.

Wade Matterson, of independent consultants Milliman, says there has been growing interest in less risky retirement products since the financial crisis. Just as balanced funds with up to 80 per cent of their assets in market-linked investments (such as shares) are under fire in Australia, the marketing of target-date funds as low-risk is receiving scrutiny in the US.

However, Matterson says it did not matter whether you had 50 per cent or 70 per cent in equities going into the downturn, you were still pummelled: "It's an asset allocation problem. It's no longer a simple proposition between equities and bonds; it should be equities, bonds and assets that hedge risks."

AustralianSuper argues its balanced option is sufficiently diversified to take advantage of prevailing market conditions. It has a slightly higher exposure to shares and unlisted assets such as infrastructure, property, hedge funds and private equity than some other funds' balanced options.

A balanced portfolio with 70 per cent growth assets has delivered an average return of 12.6 per cent a year over the past 30 years, compared with an average 10 per cent return for Australian bonds and 9 per cent for cash. However, the impact of an event such as the recent fall can seriously impact short-term returns.

According to Warren Chant, of super ratings group Chant West, the balanced option offered by AustralianSuper returned 5.9 per cent a year over the five years to December 2009, compared with the median balanced return of 5.1 per cent and 6.2 per cent for bonds. Over seven years, AustralianSuper returned 7.7 per cent compared with a median of 7 per cent and 7.3 per cent for bonds.

McNeice accepts that the risk of negative returns needs careful management in retirement when people have less ability to recoup losses. He also acknowledges one of the challenges for AustralianSuper is to help members avoid panic switching after a downturn. "We think this is a better way to extend retirement income, counter-intuitive though it may be," Silk says.

BALANCED IS BETTER

Anne, a hypothetical Australian Super member, joins the fund at 20 and plans to retire at 65. She earns $50,000, with a projected balance of $560,000 on retirement. She wants a comfortable retirement of $37,621 a year (ASFA/Westpac figure).

Watson Wyatt looked at how long typical savings would last under various conditions with different asset mixes as well as target date and age-based default options.

Under average market conditions, the age-based default provided 10 years less income than the balanced option. When it factored in once-in-20-years worst-case market conditions, there was little difference.

None provided income to Anne's life expectancy but cash performed worst and the balanced options did best.