Old Mutual Platinum Pension 2003 with-profit annuity declares positive bonus for 2012

For the ninth successive year, Old Mutual Corporate has declared positive bonus rates across all pricing interest rate categories for its Platinum Pension 2003 with-profit annuity.

Bonus

1. Applicable to Platinum Pension 2003 annuitants only.

2. Year-on-year CPI as at 31 December 2011. 1 CPI 2

The increases, which are based on investment returns for the year ending 31 December 2011, are broadly in-line with the increases granted for 2010 and 2011, but below the average increases awarded over the past 5 and 9 years.

According to Roy Stephenson, Annuities Actuary at Old Mutual Corporate, this is largely due to the fact that the previous 5 and 9 year periods included a time of very high equity returns, which provided the necessary support for the high level of bonuses that were awarded. In contrast, South African equity markets, which comprise up to 25% of the portfolio, were relatively flat over the investment period, with the JSE Index (or ALSI), returning around 2.6% for the year ended 31 December 2011.

Stephenson says this low return on equity markets was predominantly due to the loss of investor confidence during 2011 as a result of the Eurozone credit crisis. “In addition, the difficult negotiations around the increase in the US debt ceiling further compounded this effect and were accompanied by extreme levels of volatility. This volatility was also felt in the South African markets.

“Over the 2011 investment year, the South African Volatility Index (SAVI) - a commonly quoted index measuring market volatility - increased by some 25% with a peak in volatility of more than 65%. This gives some idea of the market volatility experienced over this period. This is where the benefits of smoothing of investment returns from year to year become even more valuable to pensioners, who are effectively shielded from excessive market volatility.”

Stephenson says one key consideration in deciding the pension increase for 2012 is what is likely to happen at the next increase declaration in one year’s time. “Should markets continue to recover, as they have in the first three months of the year, bonus smoothing reserves should increase and improve pension increase prospects. However, there is currently much uncertainty with respect to the outlook for global equity markets, and it is difficult to attach much confidence to an opinion regarding future investment market performance.

According to Stephenson, the aim of these products is to provide annual increases to help combat the negative effects of inflation.

“Over the last 9 year period, Platinum Pension 2003 increases across pricing interest rate categories A to D have exceeded the long-term increase expectations for these categories.”

For example, the long-term increase expectation for Platinum Pension 2003 category D is 3% p.a. This is based on a long-term inflation assumption of 5% per annum, together with a long-term real investment return assumption of 3% p.a. This is the same as saying that over the long term, we expect increases on Platinum Pension 2003 category D with-profit annuities to average 60% of CPI inflation.

The 9 year average increase for Platinum Pension 2003 category D is 3.5%, which represents an increase of some 67% relative to CPI inflation over the same period, thus exceeding the long-term expectation of 60% of CPI inflation.

1. Applicable to Platinum Pension 2003 annuitants only.

2. Year-on-year CPI as at 31 December 2011.

3. Nine year average year-on-year CPI as at 31 December 2011.