Is your RA on target to give you a decent income?

Chasing top returns isn’t the best way to secure an income in retirement. Providers of retirement annuities are beginning to adopt strategies to align your investments to your future pension, writes Bruce Cameron.

When, in the late 1980s, stand- alone, occupational retirement funds started converting en masse from definedbenefit to defined- contribution funds, retirement fund trustees essentially gave asset managers one instruction: shoot for the stars.

Tables showing comparative performance became the order of the day, with asset managers judged on returns over periods as short as three months, even though the average fund member was due to retire in 20 years.

Chasing performance often contributed to asset managers taking ever-higher risks, with spectacular results: positive at times, but all too often negative.

As a result of pressure from fund members and the Financial Services Board, occupational retirement funds have started to adopt default investment options, which aim to maximise returns when you are younger, while protecting you against loss as you approach retirement.

Once proposed regulations are enforced, all retirement funds will have to offer their members default investment options that aim to meet predetermined targets or goals based on the pensions required by members.

Retirement annuity (RA) funds currently do not offer default options.

RAs, which were introduced in 1960, are aimed at the self-employed and members of occupational funds who want to take advantage of tax incentives to top up their retirement savings.

Initially, only life assurance companies offered RAs, and the underlying investments were mostly in balanced portfolios. In the very early days, these portfolios were all capital-guaranteed, smoothed- bonus portfolios. These portfolios smoothed the returns earned by members over periods of good and bad market performance, so you were pro-