Is your umbrella fund’s investment strategy too conservative?

11 October 2022 NMG Benefits
Craigh Chidrawi

Craigh Chidrawi

For the tens of thousands of South Africans whose retirement income is sitting in an umbrella fund, an investment strategy with low volatility and low administration costs might seem like the safe, attractive option. But there’s a downside to an umbrella fund investing too conservatively and focusing more on loss avoidance than growth potential, says employee benefits specialist NMG Benefits.

Typically, South African umbrella funds provide varying levels of flexibility in the fund’s investment strategy to accommodate the wider membership of the fund and their different needs. Less flexible investments generally have low administration costs, as they’re easier to manage, while more investment flexibility results in a higher administration costs. Some funds even allow employers to create a bespoke investment strategy.

For many umbrella funds, the low-cost option often invests in a ‘smoothed bonus’ investment portfolio. Smoothed bonus portfolios guarantee, or partially guarantee, the value of the money invested in the portfolio. Returns are declared as bonuses by the insurer, and these bonuses are smoothed out to ensure income stays steady through times of negative returns.

Craigh Chidrawi, Head of Retirement at employee benefits advisory at NMG Benefits says the danger is that if the investment strategy is too conservative, the members’ investment may not achieve the returns need to meet their retirement goals.

The time horizon of the membership needs to be considered. If retirement age is many years, or even decades, away, then members can afford to be more aggressive in their investment strategy, as they have more time to recover if there is a downturn. Older members who are closer to retirement may opt for a more conservative investment strategy, depending on their plans for a retirement income after retirement, says Chidrawi.

“That’s why it’s important that members are well educated around the risks of investment strategies that are too conservative. We hear many stories about taking too much investment risk, and not enough stories about taking too little risk and getting low growth from missed opportunities. When the low growth is compounded over many years, it can be devastating to your retirement income,” says Chidrawi.

To counter the risk of over-conservatism, the employer or management committee must continually monitor the investment strategy to ensure that it meets the members’ investment objectives and their needs.

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