Although the worst of Europe’s sovereign debt crisis has been more or less averted, ordinary citizens across the globe are feeling the effects, and that includes millions of South African pension fund members.
We are entering a low-growth period, much like what we went through from 1969 to 1976, and it is critical to save now — perhaps more than ever. Pension fund members might want to increase contributions to their funds to stay on track, as low growth points to lower investment returns for pension funds.
I think we are in for a lower return world at the moment and investors need to reduce their return expectations, especially compared to recent years. You need to know what your current savings are and what you need to meet your retirement and other long-term goals. Now is a good time to call your financial adviser and ask some hard questions about your pension fund.
Ask for advice regarding the appropriate level of risk and whether you are saving enough. Take steps to ensure you’re minimising your exposure to risk by diversifying your investments. You can look at a mix of assets in your retirement fund — but do be aware of how this mix works, especially if the fund offers a range of investment choices.
To work out how much actual exposure to risk your pension fund has, the trustees can give you detailed information on the actual investment instruments in the fund’s investment portfolios.
It is important to know if the fund’s investment managers hold any bonds issued by European countries. If they do, what is the extent of the exposure?
From an offshore point of view, emerging markets continue to be attractive, offering some returns at (now considered) reasonable levels of risk. Funds should have a well-diversified foreign and local investment strategy. Investments into Africa are starting to gather momentum and this could be an area that many trustees have not yet explored.
The recent strengthening of the rand could mean some currency-based opportunities into the future. It is important to stick to the long-term plan and to be careful about automatically loading up on risk. Trustees need to ensure that the risk brings additional rewards, and should continue to manage risk with a well-diversified foreign and local investment portfolio.
Pension funds must decide on the level of exposure to risky assets that is appropriate, depending on the profile of the fund membership. This level of exposure must be constantly monitored and kept under control.
The mix of assets depends on the nature of the fund and the profile of the fund membership. A conservative portfolio option in a retirement fund that offers member level investment choice would be different to a fund with a single balanced fund investment that all members belong to. A well-diversified strategy will, however, have the appropriate allocations to local and foreign equity, cash, fixed interest and property investments for the risk profile of the membership.
Further diversification can be obtained by considering smaller allocations to infrastructure and other socially responsible investments, private equity property and possibly funds of hedge funds. For foreign investments, an allocation to Africa can be considered for geographic diversification.
Make sure your adviser knows the time horizon of your investment, and whether you’re close to retirement or not. He or she should also be clear as to how much risk you’re comfortable with and how much you’ll need to take to achieve your retirement investment goals. Investing the additional contributions in a well-diversified portfolio with a long-term focus might make sense.
Craig Aitchison is MD at Old Mutual Actuaries & Consultants
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