New personalised investment strategy to aid retirement fund goal
YOUR retirement fund may be failing you because its one-size-fits-all saving formula doesn’t cater for your unique financial situation.
South Africa’s largest retirement fund administrator believes it can fix that by introducing an investment strategy personalised for each member.
Alexander Forbes-administered retirement funds will from next month be able to implement Clarity, an investment framework that allows you, as a member, to set your own retirement income goal, with a unique investment portfolio aimed at optimising your chances of achieving that goal.
The model moves beyond the life-stage model used by many retirement funds in terms of which your retirement savings are invested in line with the number of years you still have until retirement.
The life-stage model reduces your exposure to more volatile investments designed to deliver growth – equities and listed property – in the last five to 10 years of your working life to reduce the possibility of your losing money if the market falls when you no longer have time to recover from losses.
Most retirement funds target a pot of savings that is intended to provide you with a pension that represents a percentage of your income (your net replacement ratio) in your final working years.
To reach the target, you (and your employer if it is contributing on your behalf) need to contribute a certain percentage of your income for a set number of years, earn a certain level of returns and not spend any of your savings along the way.
Most funds target a certain percentage of salary in retirement. Failing to adhere to these requirements will likely result in your savings realising a pension below the target.
To rectify this you will need to save more, work beyond your planned retirement date or invest more in growth investments such as equities, but you may not realise this when your savings are invested in line with a life-stage default investment strategy.
Sanlam’s Benchmark retirement fund survey suggests that the default investment strategy of more than 60% of retirement funds is based on the investor’s life stage.
You may also end up with too little exposure to growth investments that you need to fund your income in retirement.
Most members use investment-linked living annuities to provide an income and may need to plan for these to sustain an income for as much as three decades.
In addition, the cost of buying the income you need changes over time as the cost of the asset classes in financial markets changes.
This means that even if you contribute enough and preserve your savings throughout your working life, you could end up with an income below that which your fund has been targeting for you.
Alexander Forbes’s personalised investment strategy draws on the work of Massachusetts Institute of Technology Professor and Nobel laureate Robert Merton, who has been working with local investment manager Colourfield.
Colourfield executive director and cofounder Shaun Levitan says two people of the same age may need to invest their retirement savings in different ways because of:
● Their gender – women typically live longer than men;
● Their savings to date;
● Their returns to date;
● Whether they preserved their retirement savings in the past; and
● Their income goals in retirement. Despite being the same age and earning the same salary, one member may be on track to have a pension that is equal to 45% of their income and the other may already have saved enough to provide 100% of that income as a pension.
Assuming they have the same retirement income goal, they should not have the same savings strategy, Levitan says.
The one needs a high allocation to growth investments and the most prudent thing the other can do is to consider investing in a way that matches their future income needs more closely, he says.
Alexander Forbes head of client solutions John Anderson says the company will offer allocations matched to income needs as the default investment strategy on all funds under its administration from April
1. Anderson says if you are a member of one of its funds it will design your investment portfolio taking into account all the information the administrator has about you including your income goal, age, gender and the savings you have in the administrator’s preservation fund, umbrella fund or RA, but not savings held with other financial institutions.
Anderson says the investment management cost for members with varying levels of exposure to growth assets will be in line with what the group’s investment company is currently charging because members’ funds will be invested in a blend of actively managed and passively managed smart beta funds (funds that invest in line with rules designed to harvest investment factors that drive the market).
Only funds that choose the peer-focused portfolio of active managers to manage their growth assets may pay a higher fee. —