Why dreams go unfulfilled

PERFECT STORM: CAN LEAVE AN INVESTOR UNDERFUNDED FOR LIFE

Latest figures prove how poorly retirement funds perform.

The latest three-year figures prove just how poorly retirement funds are performing.

On paper, all retirement planning is perfect. You punch a couple of numbers into a computer, make some assumptions on contributions, time period and growth on your investments and, voila, the answer comes back in an instant.

You are on track or, if you are not, the computer programme will tell you how to fix it by making additional investments or working longer.

Most retirement planning programmes assume an inflation-beating rate of return. Most assume inflation plus 3%, 4% or 5% in making these calculations.

But what happens when these projections turn out to be incorrect? Even worse, when a great number of investors do not even realise this is happening?

Former president Jacob Zuma’s Nhlanhla Nene stunt seems to have been a catalyst for the start of a severe and substantial underperformance of the JSE, not only against global markets, but also against its peers in the emerging market space.

Now, if your money is in a discretionary portfolio, you can switch to asset swap funds or use your offshore investment allowance.

Restrictions imposed on pension funds by Regulation 28 have further combined to produce below-inflation returns over one year, three years and possibly over five years should this trend continue.

In many other parts of the world, members of a pension fund are free to invest in any asset class anywhere. But why is it not the same in SA?

We are still clinging to the patriarchal notion that a regulator somehow knows what is good for investors, even if it impoverishes them over time.

That is the real elephant in the retirement room.

The latest three-year figures from the Association for Savings and Investment SA show how poorly retirement funds are doing. Over three years (to end June 2018) the CPI index is up by 16.3%.

Cumulative average growth for high equity multiasset funds came to 12.8%, for medium equity funds 13.4%, while low equity funds fared best with cumulative growth of 17.6%.

When costs are deducted from these numbers, all three categories of retirement funds are underwater compared with inflation.

In other countries, this type of underperformance reaches the front pages of newspapers and is debated in parliament.

Those in SA who have money invested in a nondiscretionary portfolio are paying the price for this current confluence of factors.

An increasing number of high net worth investors are cashing out their pensions/ preservation funds, opting to pay the steep taxes now, rather than risking their retirement capital in underperforming funds. Most of the money extracted this way finds its way to offshore markets.

Maybe that’s why the pensions industry is so quiet about this issue.

What to do? I think investors should put time aside for a discussion with a financial advisor.

See where in your overall portfolio you can increase your exposure to foreign assets, either within the permissible rules of the fund, or to get money offshore directly with some available cash.

Magnus Heystek is investment strategist at Brenthurst Wealth.