Reducing risk as members reach retirement age
When Novare Actuaries & Consultants started providing investment consulting and advisory services to the Transport Sector Retirement Fund in 2013 the fund had a market value of R3.1-billion. Today, the market value is around R6-billion, according to Puseletso Mbele, fund manager at Novare.
She says the growth is a result of both investment performance and contributions.
“When we started providing investment consulting and advisory services to the fund we had one investment strategy portfolio, which didn’t cater for members who were close to retirement as they risked losing accumulated gains. For example, in December 2015, the Cabinet reshuffle that saw the then Finance Minister Nhlanhla Nene being removed resulted in the JSE losing in the region of R80-billion.
“We felt it was important to have a strategy that aims to accommodate members who are close to retirement to ensure that what they built up in their ‘accumulated pots’ is not adversely affected should unforeseen events trigger extreme market volatility.
“This year in May we recommended that the fund adopt a default investment risk reduction programme that is a three-life-stage model, which will cater for all members’ interests.”
Mbele explains that the life stages have their own respective objectives (benchmarks) to achieve: Aggressive Portfolio CPI + 4.5%; Moderate portfolio CPI + 3.25%; and Conservative portfolio CPI + 1%.
“The previous investment strategy had a performance objective of CPI + 4%, and the fund comfortably beat this target objective from 2013 until 2015. However, in 2016 the fund did lag behind its objective, hence the need to implement the life stage model (LSM).
“Brexit, the US elections, emerging market instabilities and our political environment all contributed greatly to the fund’s underperformance in 2016.”
The Transport Sector Retirement Fund trustees adopted the three-stage, phased approach for the implementation of the LSM, according to Mbele.
“This is a default investment strategy where all members of the fund are initially switched according to the number of years to retirement, and then phased accordingly into the correct risk profile.
“The LSM allows the fund to reduce market risk for members as they approach normal retirement age.
In addition to risk reduction, the LSM aims to protect the member’s accumulated fund credit as they approach retirement. The risk is managed by gradually reducing the risk seeking to more conservative asset exposure as the member draws closer to the normal retirement age of 65.
Mbele reports that the fund has yielded a return of 9.31% for the past four years (June 2013 until June 2017).
“The Transport Sector Retirement Fund has very clear guidelines on risk management, procurement policies, and what it is they require from their service providers in terms of investment benchmarks.
“The fund made it clear that it would like to support transformation in South Africa via its investments and has provided clear targets.
“Furthermore, the fund ensures that its investments are aligned with members’ interests,” says Mbele.
“For example, the fund has invested in highway truck stops, because it is a direct benefit to members and aligns the fund’s interests with members’ interests.”