Concern over pension fund depletion

Members worry if they will have enough

Guy Chennells, marketing actuary at Old Mutual Corporate says members of pension funds are mostly concerned with whether or not their investments will be enough in retirement – and if they are safe.
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Guy Chennells, marketing actuary at Old Mutual Corporate, says seven intensive focus groups, conducted for Old Mutual, revealed that over and above all other financial concerns, members were most concerned about whether or not their investment will be enough in retirement – and if that investment is safe.

Huge amounts of time and resources are dedicated to designing retirement solutions and products for members.

However, Old Mutual research into the core concerns of members has provided valuable insights into the profile of retirement fund members and revealed that a smoothed bonus investment product that incorporates guarantees could be the best suited investment tool to meet member’s needs.

“Based on this profile of members, it became clear that the best investment vehicle for members is one that can achieve attractive growth in a responsible manner – and that does not expose members to too much risk,” he says.

Chennells points to smoothed bonus investments with guarantees as the ideal tool for members with a low appetite for investment losses.

“In smoothed bonus investments, members are protected from leaving their fund and crystallising investment losses and also achieve a level of capital protection.

"Given this protection, investors can target a more aggressive underlying investment strategy with a better chance of high returns.

"This is the key – it is not protection for protection’s sake; it is protection in order to be able to chase the highest possible growth,” he says.

Furthermore, Chennells says by protecting investments against severe market risks through the smoothing mechanism, members can pursue more aggressive growth investments which outperform the more conservative investments.

Meanwhile, guarantees provide peace of mind for investors that their savings can never drop below a certain level. 

“In a paper presented at the 2012 Actuarial Convention, an analysis was conducted of how an aggressive, moderate and a conservative fund would have fared over the last 40 years, relative to the above investment objectives.

"The results revealed that the smoothed fund clearly achieved both the growth and risk objectives,” he says.

According to Chennells, although critics have questioned the value of guarantees the value of the protection they would offer in a drastic downturn should not be overlooked.

He says guarantees are built in to retirement products specifically to cater to member’s risk averse nature.

“We went through 2008/9 without guarantees being called upon.

"However, if from the bottom of the crash, the markets had taken a while to recover or had fallen even further, anyone with an 80% guarantee (let alone those with a 100% guarantee) would have been much better off than investors who were facing the prospect of having to retire or withdraw on 25% less than they had just a few months before,” he says.

Chennells says South Africa has been lucky.

“Just because you won at the horses last week, does not make it prudent to bet your most valuable asset on another win this week.

"Our economy has fared well given the circumstances so far, but it would be naïve to assume that we are somehow immune from realities that have hit bigger and more established countries than our own,” he says.

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