Measurement key to success of retirement fund management

The performance of a retirement fund is best measured by its ability to help members achieve reasonable net replacement ratios (NRR). This is a measure that has been developed to help members gauge their ability to sustain themselves financially throughout their retirement.

“Factors impacting a member’s NRR such as contribution rates, returns relative to salary changes, preservation rates, annuitisation rates etc, should be assessed on a regular basis so as to accurately measure the effectiveness of a chosen strategy and make the necessary adjustments to the strategy” advises John Anderson, Alexander Forbes Financial Services (Pty) Limited.

While this may seem obvious Anderson goes on to point out that such a diagnostic tool, which essentially looks at the adequacy of benefits to meet member needs, can be extended to all aspects of the employee benefits program, including death, disability and health benefits since each of these adds to a members’ overall financial wellness.

As such, the analysis should also “include how general member behaviour impacts the ultimate net replacement ratios that members can expect from funds” adds Anderson.

Detailed analysis and tracking gives trustees, management committees and employers a good idea of how their fund compares to industry, as well as the key issues impacting the financial wellness of their members.

It can also assist in asking, and more importantly answering, questions like:

• Are members on track to achieve reasonable retirement incomes taking their total income into account?
• Is the benefit design meeting members’ needs? Are there shortfalls?
• What are your fund’s withdrawal rates? Are these above or below industry norms? Are there specific categories of members penalised by your withdrawal rates and, if so, why?
• How do your preservation rates compare to industry averages? In which areas can these be improved? What can be done to improve these in your case?
• What are your cost ratios? How do they compare to industry statistics? Are your costs and benefits in balance?
• How do your contribution rates compare with other funds? What can you do to maximize the utility of the amounts being spent on your benefit arrangements?
• Are your members / employees adequately insured in the event of death and disability? Are there areas where improvements can be made?
• What NRRs are currently being achieved by your members / employees and what NRRs can be expected to be achieved by your members / employees in future? What can be done to improve on this?
• Have the steps that were put in place to improve this worked? Should a different approach be taken?
• What investment choices are being selected by members? Are they reacting to short-term market movements? Are there categories where the experience is out of line with industry norms? Do members understand their choices?
• What retirement options are being selected by your members? Are they purchasing adequate inflation protection? Are they purchasing adequate longevity insurance?
• Are the pre-retirement portfolios appropriate in light of what options members are taking at retirement? Are the portfolios optimally integrated?

Making use of tools that ask, and then answer, questions like these are key to the strategic management of a successful retirement and employee benefit programme, “much like the strategic tools used by businesses in ensuring they meet their objectives in an ever-changing environment” explains Anderson.

Importantly, the outcome of such a diagnostic approach assists in identifying areas where members may need additional assistance, in the form of retirement or financial advice or improved communication for example.