Re­tire­ment An­nu­ities

As av­er­age life ex­pectancy in­creases, it’s more im­por­tant than ever to start sav­ing for the fu­ture, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Front Page -

The job for pen­sion fund man­agers to plan for 30 years into the fu­ture is not an easy one. And it be­comes in­creas­ingly fraught when one con­sid­ers the shift­ing goal­post cre­ated by their clients’ longer av­er­age life ex­pectancy.

Re­tire­ment years are now al­most as long as work­ing-age years. Nat­u­rally, in­vest­ment strate­gies and the ways in which re­tire­ment prod­ucts are struc­tured have adapted as a re­sult.

Longer av­er­age life spans also of­fer the op­por­tu­nity to work for longer, and there­fore to put those pro­duc­tive years to good use by sav­ing in that time.

But even if in­vestors work and save for longer, fu­ture re­turns are likely to be more muted than they were in the pe­riod lead­ing up to the global fi­nan­cial cri­sis. Many vet­eran in­vestors will look back long­ingly to a lit­tle more than a decade ago, when the com­modi­ties boom was pro­pel­ling the lo­cal mar­ket to record an­nual re­turns up­wards of 20%.

“The re­turns SA in­vestors ex­pe­ri­enced in the decade pre­ced­ing 2008 were ab­nor­mal rel­a­tive to long-term, in­ter­na­tional re­turns on eq­uity,” says Al­lan Gray’s Daniel van An­del. “While we don’t know what the fu­ture holds, odds are against us see­ing those sus­tained lev­els of re­turn again any time soon.

“The most re­cent decade tells a dif­fer­ent story. SA eq­ui­ties have re­turned no more than 10% on an an­nu­alised ba­sis over the pe­riod, which is a more nor­malised view of eq­uity re­turns.”

Van An­del points out that pe­ri­ods of such strong growth should not be in­cluded in pro­jec­tions and mod­el­ling. “When de­ter­min­ing how much to save for re­tire­ment, a more pru­dent as­sump­tion is a real re­turn of 4%-5% over the long term. “Any­thing more than this should be con­sid­ered a bonus,” he says.

Re­view­ing the state of the pen­sion fund in­dus­try, Van An­del says one of the big­gest in­di­ca­tors of health is in the in­flows. The first quar­ter of 2018 has de­liv­ered de­cent in­flows af­ter a slight hic­cup in 2016 and 2017, when fund in­flows slowed by 11% and 12% in nom­i­nal terms re­spec­tively.

He says re­cent in­dus­try re­forms show pos­i­tive signs, with the reg­u­la­tor fo­cused on promoting greater guid­ance, trans­parency, flex­i­bil­ity and sim­plic­ity.

“The ef­fec­tive an­nual cost stan­dard in­tro­duced in 2016 is an ex­am­ple of a good mea­sure which has been in­tro­duced in the re­tail space to en­able in­vestors to un­der­stand and com­pare the fees they are pay­ing on their in­vest­ments. There is great value in be­ing able to eas­ily com­pare fees payable across providers and iden­tify when you as an in­vestor are pay­ing more than you should be,” Van An­del says. “A re­tire­ment prod­uct should be a sim­ple, un­der­stand­able, good value for money of­fer­ing which in­vestors can eas­ily use to achieve their re­tire­ment goals.”

Mea­sures such as this, which fos­ter a sense of trans­parency and con­trol, will be im­por­tant in en­cour­ag­ing savers to con­trib­ute to, and sup­ple­ment, their work­place pen­sion fund.

This is a men­tal hurdle that no-one has yet been able to com­pletely con­quer. Hu­man

“When de­ter­min­ing how much to save for re­tire­ment, a more pru­dent as­sump­tion is a real re­turn of 4%-5% over the long term. Any­thing more than this is a bonus

na­ture is to put off what can be put off, and re­tir­ing from work many decades in the fu­ture sel­dom car­ries the sense of ur­gency it de­serves.

The dis­ci­pline of con­tribut­ing to a monthly pen­sion fund is dif­fi­cult enough to swal­low with­out then hav­ing to worry that even that will not be enough to se­cure a com­fort­able re­tire­ment.

A re­cent sur­vey by Old Mu­tual on mil­len­ni­als’ sav­ings and in­vest­ment pref­er­ences shows higher num­bers of this co­hort are in­vest­ing than are older gen­er­a­tions. Nearly a quar­ter of re­spon­dents are in­vested in a unit trust, against only 2% of older gen­er­a­tions. A greater pro­por­tion (35%) are also sav­ing money to pay back debt, com­pared with 13% of older South Africans.

Though th­ese num­bers are en­cour­ag­ing, An­drew Dav­i­son, head of ad­vice at Old Mu­tual Cor­po­rate Con­sul­tants, says the big chal­lenge is to de­velop this cul­ture of sav­ing for emer­gen­cies while also in­vest­ing for re­tire­ment.

“If you ne­glect the short­term sav­ings, you get the sit­u­a­tion where peo­ple need money for short-term needs, so [they] cash in their re­tire­ment sav­ings when they change jobs,” says Dav­i­son.

Get­ting peo­ple to change their view of re­tire­ment is cru­cial. To do this, he says it is help­ful to con­sider re­tire­ment sav­ings as deferred in­come that you will draw on in re­tire­ment. Peo­ple should di­vide their adult life into two pe­ri­ods: the time when they are work­ing, and the time when they are no long work­ing.

They need to hold back some of the in­come they earn to­day to use in the fu­ture. ●

An­drew Dav­i­son … Save for re­tire­ment, but don’t ne­glect short-term sav­ings

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.