Shaun Harris
TAKING STOCK
Pensions are an important and sensitive issue. A working person has a vision of what their financial position will be after they retire, and all too often that vision does not match up to reality when they reach retirement age.
Retirement statistics in South Africa are depressing. For example, it’s estimated that the average length of membership of a retirement fund here is 15 years, and dropping. The problem is that when a person changes jobs they often don’t transfer their retirement money to a new fund, or put it in a preservation fund – instead they cash out their contributions, take the full tax hit and blow the money.
Retirement expectations not matching reality is bad enough, but it’s even worse for the unemployed who don’t have decent retirement benefits to look forward to. State grants are hopelessly inadequate, and with the extended family breaking down, the pensionless only have poverty to look forward to.
Therefore it was not surprising that a recent article in the national Sunday press got pulses racing. The suggestion, apparently emanating from the Financial Services Board (FSB), is for a national pension scheme that all South Africans can draw from based on compulsory retirement provisions.
Dube Tshidi, head of pensions at the FSB, could not be contacted, but it’s an issue Taking Stock will be following up. As reported, though, the scheme seems unworkable.
The heart of the issue is the individual’s freedom to choose where and how they want their money invested. This applies increasingly to pension and provident fund management, a nightmare perhaps for trustees who have to ensure pension money is invested safely, but important for fund members as they grow more financially sophisticated.
Pension funds are governed by rules, set by the authorities on the one hand and by the individual fund’s regulations on the other. Within these parameters – conservative perhaps but intended overall to protect retirement money – fund members have more choice.
Over the past few years in South Africa a number of large organisations, probably the majority, have allowed company pension fund members to vote on whether they want defined benefit or defined contribution funds. Many, it seems, opted for the defined contribution route.
The underlying rationale is sound and it does offer members more room to influence the fund’s investment decisions, but there has been fall-out.
Many pension funds switched to defined contributions shortly before the Asian crises that knocked equity prices worldwide, often severely lowering the value of the funds.
Timing was the problem. A sharp correction in equity prices should not pose a problem for younger members of pension funds – about the only certain thing with equities is that over the longer term they do outperform other classes of investments. But older members, particularly those on the verge of retirement who suddenly found themselves members of a defined contribution fund, took a knock.
And that’s a painful experience when you have spent your working life contributing to a retirement fund.
Riaan van Dyk, head of Momentum Advisory Service (MAS), says giving fund members the choice between defined benefit and contribution funds without giving them the flexibility over where to invest the money “is almost criminal”.
Investment choice is critical for members, he says, but giving members choice without sound financial advice is nearly as bad.
Van Dyk says MAS, which has launched a new multi-management wholesale pension product, Group Investment Option, tries to integrate investment advice with the product.
Pension fund management today often goes the multi-manager route, which is safe but not perhaps always in the best interests of members.
“Our approach is to go to the trustees of a fund and, if they are using all the fund managers, question whether they are really adding value for their members,” Van Dyk says.
MAS instead emphasises selection of fund managers, shortening their list and restricting it to players who, after research, they believe will offer the best performance over the long term.
That’s the essential difference between pension fund management and, say, running a unit trust fund. Both will emphasise a long-term view, but with retirement funds it really is long-term. Van Dyk says MAS takes a view of at least a three-year rolling period.
“By researching and limiting our list of fund managers we feel comfortable that we will get predictable outperformance over the long term,” he says. “We’re not looking for performance that will shoot the lights out – if it does, that’s fine, but long- term predictability is far more important.”
While there is no single perfect investment process, what MAS tries to avoid is bad processes. “We focus on finding a process that is clearly defined and strictly adhered to, while at the same time being dynamic and taking market conditions into consideration.”
Van Dyk also says the quality of a fund manager’s staff is important. MAS does not back individual fund managers, but rather funds that make good team-based decisions.
The idea behind the product seems good, and it provides yet another option pension fund members can lobby for. That’s the problem with increased freedom of choice – it carries a corresponding weight of responsibility, especially onerous when it comes to retirement money.