Retirement fund savings have come a long way since all you were offered was
a defined benefit fund, which was managed by a group of management
functionaries pretending to be trustees looking after your interests. Ever
greater choices are being given to retirement fund members today.
Last year the Financial Services Board sounded a warning about the wide
range of investment options being given to retirement fund members, as
there were risks that could result in members not having sufficient funds
when they retired.
The warning came as linked product companies and brokers saw retirement
funds as a new source of profits.
Among other things that concerned the FSB was that costs and commissions
would be out of proportion to the services required. At that stage, most of
the funds using the linked product company route tended to be smaller
funds.
Absa Consultants and Actuaries, which looks after some of the biggest
pension funds in the country, including the significant Absa Group Pension
fund, has been looking at ways to increase options, while at the same time
providing proper management of risk.
Johann Grobler, managing director of Absa Consultants and Actuaries, tells
me that although it is theoretically possible to give members an absolutely
free choice in investment, there are legal constraints.
These include:
* The necessity for a fund to comply with what are called the Pigs, which
stands for the Prudential Investment Guidelines, which lay down certain
limits, including a limitation of more than 75 percent of assets being
invested in shares;
* The use of funds to secure debt;
* The manner in which benefits can be paid out to members; and
* Limits on foreign investment.
But more importantly, Grobler says that legal opinion obtained by Absa
Consultants and Actuaries holds that there is an onus on the trustees of
funds not to willy-nilly give free choice to fund members.
"A board of trustees has a fiduciary duty to act in the best interest of
the members and they would be in breach of their duty should they allow
members carte blanche in the type of investment portfolios they choose."
But Grobler does not think this should result in members being given the
most common choice available to defined contribution fund members, namely,
a market-linked or guaranteed (where your capital is guaranteed but with
minimal growth) product.
Grobler says members should be given a choice of investment portfolios
compiled to accommodate the various risk profiles of fund members.
The portfolios and their underlying portfolio managers still have to be
monitored by a fund`s board of trustees to ensure that the risk profile, as
well as investment performance, is maintained.
In general terms, members who are still some way off retirement, or
possible resignation, should consider market-linked portfolios.
Grobler says market linked portfolios can be constructed in a number of
ways, altering the risk profile. Examples are:
* A high equity portfolio with 65 percent invested in the local share
market and 10 percent offshore; about 20 percent in bonds (15 percent local
and five percent foreign); and five percent in the money market;
* A medium-risk balanced portfolio, with 55 percent in equities (45 percent
local and 10 percent foreign); 30 percent in bonds (25 percent local and
five percent foreign) and 15 percent in the money market; and
* A low-risk high interest portfolio, with 35 percent in equities (30
percent local and five percent foreign); 20 percent in bonds (15 percent
local and five percent foreign) and 45 percent in the money market.
A retirement fund member approaching retirement should be looking at either
100 percent investment in the money market, or a guaranteed portfolio.
Grobler says with guaranteed products, the move is away from traditional
guaranteed smoothed bonus portfolios, to the new generation guaranteed
products, where you can get guarantees on capital and the growth tends to
be linked to an index. The guarantees come in various shapes and forms,
offering a wider range of choice.
Examples are:
* A 100 percent guarantee on capital, but a maximum of 19 percent on growth
is paid; or
* A minimum return guarantee of six percent, but limited to 15 percent.
Grobler also believes that rather than wrapping together unit trusts, which
has been favoured by brokers attempting to sell a wider choice through
linked product companies, it is better to use the multi-manager route.
The multi-manager system is based on selecting individuals or asset
management companies who have skills in different markets or market
sectors. By using this system, assets can be properly allocated and
monitored.
Grobler says the multi-manager system also allows a board of trustees to
keep track of investments enabling it to fulfil its fiduciary duties.
This makes a lot more sense to me than the high risk nature of using the
full range of choice available through the linked product companies,
particularly as there is no guarantee on the level of advice, some of which
so far has been pretty appalling.
One word of caution to trustees: if you go this route, you will also have
to establish the costs involved as compared with the traditional one-asset
manager choice.