Few funds offer smoothed bonus option

Despite belief that it offers most stable returns

An interesting contradiction emerged from the results of the 2008 Sanlam Employee Benefits (SEB) retirement benefits survey. It showed that 86 percent of those surveyed (principal officers and trustees) believed that it is important to offer stable returns to members for their retirement savings, with smoothed bonus portfolios rated best at achieving this. However only 26 percent of funds actually offer a fully vesting smoothed bonus option where members have the opportunity to make their own investment choice. According to Dawie de Villiers (pictured), CEO of Sanlam Structured Solutions, this is tantamount to the service providers not listening to the needs of fund members and administrators.

Explaining that smoothed bonus funds have a definite role to play in retirement saving, in particular for lower income earners and those that are retiring on limited savings, de Villiers believes that this should be an option in the majority of funds. “In smoothed bonus portfolios, investment returns are smoothed by way of regular bonus declarations. In the process they lessen the roller-coaster ride that investors in market-linked portfolios might experience.”

He said that smoothed bonus portfolios offer the saver some good benefits. “The bonus cannot be negative and it is paid out monthly. In addition, the portfolio is diversified across the asset classes, including cash, bonds and equities so the member gets balanced returns in good and bad times.”

“Of course, for the younger person, a higher risk, equity-based investment option may be preferable but I believe, they should have the option of switching to a safer model if their circumstances change. For example, if they are likely to switch jobs or if they are nearing retirement age.”

De Villiers believes that a number of developments in the retirement industry have led to three quarters of funds excluding the smoothed bonus option. “The stock market has been strong since 2003 so equities have offered good, attractive returns. Many people have switched out of more conservative portfolios to take advantage of the returns. But it is a fact that markets go up and down and, while the younger saver has the luxury of taking a long-term view, a retiree cannot afford the dip so needs a balanced and diversified portfolio with smooth returns.”

Another factor could be absolute return portfolios. “When the market is doing well, an absolute return portfolio is very attractive because you get the returns without paying for the guarantees. However, when the market turns these products may even deliver a negative return, again, something which a retiree or lower earner simply can’t afford.”

The popularity of lifestage products will also have played a role, says de Villiers. “Many financial planners and advisors strongly recommend the new lifestage product to their clients and, while in principle it is an excellent concept, in its current format it does have certain weaknesses. For example, the products ‘assume’ that the retirees life ‘ends’ after they stop working and member’s savings are switched out of equity prior to retirement, only to be reinvested in equity after retirement, the so-called ‘life stage’ gap. . This switching can lead to a significant loss of investment returns.

“In my opinion there is room within the lifestage product for a smooth bonus option which changes during the member’s lifetime but still offers an aspect of guarantee and smoothing.”

De Villiers concludes that financial institutions have a responsibility to offer the products which offer the best possible return to clients. “There are some fees for the guarantees with these products provide, but for those who can’t afford to risk their savings and returns, the benefit of the smoothing process is well worth those fees. I would strongly recommend these being reintroduced as the default investment approach in retirement funds.”