Financial Mail - Investors Monthly
QUESTION OF TIME
We are living for longer — and our retirement investment strategies need to factor this in
Speaking to a fund manager or financial adviser about retirement savings invariably leaves one feeling inadequate. And there is no shortage of statistics to back up the build-up of unease.
The National Treasury, for instance, says only 6% of South Africans will be able to retire comfortably. And according to the Sanlam Benchmark Survey of retirement funds, just 19% of members in standalone funds and 14% in umbrella funds can maintain their standard of living on retirement.
One last number that shouldn’t come as a shock, but that really drives home the point, is that living to 100 or more is going to be a reality for a growing number of people.
“I actually think [the situation] is much worse than what is generally perceived,” says PSG Wealth’s chief investment officer, Adriaan Pask. “We have a massive pension gap in terms of what is required to retire comfortably and what investors are saving.
“Our savings rate is way below what it ought to be, which is not a problem that is unique to SA. Many developed markets are struggling with the same problem. Where we stand at the moment, there is a $70 trillion global deficit that is set to increase to $400 trillion by 2050.
“To put that in context, the global financial crisis is estimated to have lost equity investors between $2.8 trillion and $6.6 trillion, so it is a far more significant crisis we have on our hands to get people to save much sooner and more often.”
Then factor in our longer life span, which research shows has increased by three years every 10 years since the 1940s, says Pask.
“Maybe 20 years ago, your post-retirement investment horizon would have been 20 years,” he adds. “Now you’re probably looking at 30 or 40 years, which is more or less the same as your working life.”
Naturally, these permuta- tions and predictions occupy the minds of actuaries and pension fund managers, who have to try plan for a future 40 years hence. And those 40 years might become 50 or 60 as the retirement age is pushed back in response to people living longer.
That is certainly something John Anderson, group head of client solutions at Alexander Forbes, has taken into account. Together with Sygnia Asset Management’s Steven Empedocles, he published a paper in 2016 on the “retirement income frontier” as a possible solution to the annuity puzzle.
Anderson explains that the theoretical answer to ensuring income in retirement is to take out an annuity product with longevity protection — like an insurance product against living longer.
“The problem that we’re seeing is that more people take a living annuity with no longevity protection and they typically invest it in a conservative portfolio,” he says.
This strategy is bound to find retirees facing a significant shortfall, if this is the basis of their retirement strategy.
Anderson says he and Empedocles therefore considered an alternative approach at retirement that is more suited to a pensioner’s goals — whether these be earning an income for longer, or being able to leave a meaningful legacy.
“You can then create what is called the retirement income frontier, which gives you the optimal strategy for your goals.
“What we realised is that people, from day one, are focused on investment returns, where for retirement specifically they should purely be focusing on income.”
As a result of this research and changes in the industry, he says, hybrid annuity products have started emerging. This has already helped pensioners make better-informed decisions that could help them secure the income they need for the period they need.
Anderson points out that while the paper focused on the effect on decisions at retirement, the same principles apply in one’s working years.
This has become easier with the introduction of products that help savers adapt their strategy to their life stage. Portfolios may be invested more aggressively in growth assets earlier in an investor’s career, moving progressively into more conservative assets as he or she nears retirement.
With retirees facing increasing life spans, this approach might need to be adapted, says PSG Wealth’s Pask.
He suggests that because the time horizon is now so much longer, retirees could use that extra time to remain invested for longer in highergrowth assets — within reason, of course.
“You actually have so much time left, you can’t afford to be invested too conservatively. So there is definitely a space for equity investment post retirement, especially considering you may still have another 30or 40-year time horizon left.” ●
“The problem that we’re seeing is that more people take a living annuity with no longevity protection and they typically invest it in a conservative portfolio