New pension fund solution to combat market volatility
When all is said and done, nobody has a better understanding of investment behaviour than the financial advisor. No one is in a better position to explain, for example, why national savings rates trend higher during tough economic times. Surprised? We certainly were; but after a bit of investigation the fact is easily confirmed. As share prices tumble and talk of recession increases consumption behaviour changes. Hard times make people more aware of the need to save for a rainy day! The sudden deluge of articles on the adequacy of retirement savings is a case in point.
In the five years starting 2003 equities provided fantastic returns and pensioners were quite happy to draw more than 5% on their living annuities. The capital growth on their portfolios more than offset these withdrawals. But things have changed. We’re now faced with the prospect of a negative capital return on the JSE for 2008. And that means the capital available to underpin the pension salaries of thousands of South Africans will be severely depleted. What pensioners need is a simple and transparent pension fund that protects them throughout retirement. And Sanlam Structured Solutions has launched just such a fund.
An innovative retirement solution
They’re calling the new product the Complete Pension Picture, which is described as “a with profit annuity where pensioners receive an increase after the deduction of charges and the purchase rate…” It’s a guaranteed for life product rather than a living annuity. Every effort has been made to ensure the transparent calculation of increases and fees, with no ‘black box’ calculations to influence the level of ongoing pension increases. According to Dawie de Villiers, CEO of Sanlam Structured Solutions, “pensioners are often disillusioned when they receive increases not in line with the performance of financial markets – and this leads to a lack of trust in the service provider.” This product addresses such concerns.
The Complete Pension Picture guarantees a 0% minimum increase. Annual increases will be linked to the average five-year return on the ALSI 40 Total Return Index (ALSI) and the All Bond Index (ALBI) – each carrying a 50% weighting. Based on Sanlam’s own calculations the 50:50 split between equities and bonds has proven to be the “optimal asset allocation” for a product of this type. Each year’s increase calculation will comprise the return as mentioned above, less and all inclusive fee of 2.5% and the purchase rate. “The pension increase formula is uncomplicated and easy to understand, which makes the offering credible,” says De Villiers. The purchase rate is set at 3% for new business quotations and between 3% and 5% for conversions to the fund or new entrants.
The company provides a table to demonstrate how the Complete Picture Pension would have performed alongside CPI, Sanlam’s old With Profit Annuity and a competitor. On average, the new fund outperforms each of these measures going back to 1993.
Why should a pensioner consider the product?
Sanlam provides a list of motivations for pensioners considering the product. They believe the completely transparent increase based on a defined formula will prove irresistible – pensioners could even calculate the annual increase for themselves. The decision that increases will not be held back to restore funds in a downturn will prevent unnecessary hardship in retirement. And back testing the product shows better performance than the company’s own ‘with profit’ annuity. The back testing reveals that a pension of R1 000 per month in 1993 would be R4 411 per month today.
Sanlam believes the Complete Pension Picture will provide “a future that pensioners can believe in.” They describe it as an “optimal solution, maximizing risk adjusted returns.
In our view, a product that improves on the existing offering is a step in the right direction.
Editor’s thoughts:
As global equity markets tumble pensioners are faced with a number of disturbing realities. They’ve been warned that drawing down too much on their living annuities could be fatal – and face the real possibility of reductions in their pensions. What pensioners need is a simple product with low fees and minimal volatility. Do you think the new Sanlam Structured Solutions fund addresses these needs? Add your comments below, or send them to [email protected]
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