Growing shift to defined contribution retirement funds placing increasing investment risk on individuals
The worldwide shift from defined benefit to defined contribution retirement funding is continuing unabated, including in South Africa, increasingly placing the risk of building up sufficient retirement capital in the hands of individuals.
In addition, through the growth of member choice, which enables fund members to choose their own investment options, the responsibility for investment decisions has shifted to retirement fund members, most of whom do not keep up to date with changes in investment market conditions, products and techniques.
This is the view of Jim Morris (pictured), Senior Vice President, Institutional Solutions at Nasdaq-listed SEI Investments, which specialises in offshore investment solutions and structuring offshore portfolios.
SEI, which has an office in Johannesburg, currently has around R10 billion under management offshore on behalf of major and mid-tier South African institutions. Internationally, US-headquartered SEI has more than 20 offices, managing more than $US200 billion of long-term investments in various parts of the world.
“Member choice has not really worked in the U.S. where only 17-20% of people in defined contribution schemes actively keep up with investment market changes and interactively manage their retirement funds,” said Morris on a recent visit to SEI’s South African office and institutional clients.
Importantly, he said, there has been a change in focus in the retirement fund industry away from chasing returns to managing risks.
However, it is vital for retirement fund members not to be too conservative early on in retirement capital building years and not too aggressive in the final retirement capital building years.
“It is important to focus on the fact that many retirement fund members will have quite a generous life expectancy after 65, still the typical retirement age. This means that accumulated capital may have to provide returns for several years,” stressed Morris.
“Goals-based investing has become an important strategic focus, knowing where you want to go and then working out how to get there by taking the least amount of risk.”
Using modern investment techniques, he says there are ways for investors and investment managers to de-risk portfolios while remaining invested in the market.
Commenting further on the shift from defined benefit to defined contribution retirement funding, Morris said around 44% of global pension assets are invested in defined contribution schemes compared to 34% a decade ago. In Australia, defined contribution accounts for no less than 87% of pension assets.
In addition, many employers around the world are freezing their defined benefit schemes or closing them to new entrants, automatically putting new employees into defined contribution schemes.
“Fiduciary oversight is just as important in the defined contribution arena as in the defined benefit arena, as are factors such as economies of scale and access to state of the art investment ideas and techniques,” said Morris.