Old Mutual Pensioners Weather Volatile Markets

The 90 000 people who receive with-profit pensions from Old Mutual can look forward to an increase in their monthly pension payments in 2009 that offsets at least some of the effects of inflation, despite the volatile equity markets last year.

“While this year’s increases o­n Old Mutual’s Platinum Pension portfolios are lower than in previous years, we believe they are still exceptionally strong given the poor performance of markets during 2008, o­n which these increases are based,” says Trevor Pascoe, head of investment services at Old Mutual Corporate.

2009 increases

Platinum Pension consists of various categories. Each category has a pre-determined investment return, called the ‘pricing interest rate’. This can be seen as the minimum return Old Mutual needs to earn o­n the investments backing the pension payments. The higher the pricing interest rate, the higher the starting pension but the lower the expected increase declared each year (and vice versa).

Any investment return in excess of the pricing interest rate can be declared as an increase. So in order for a pension category to receive an increase, the actual investment return needs to be higher than the pricing interest rate.

Old Mutual has declared positive increases o­n all categories in both its older Platinum Pension product, which closed for new business in 2003, and o­n its newer Platinum Pension 2003 product.

Pascoe says while the SA Equities (All Share) return for the year ending 31 December 2008 was -23%, pensioner increases were still possible because Platinum Pension portfolio returns are smoothed from year to year.

“This means that in years when market returns are high, increases tend to be lower than market returns, with the difference being put aside into the bonus smoothing reserve. When market returns are poor, increases tend to be higher than market returns, with the difference being made up from the bonus smoothing reserve. With market returns during 2008 amongst the worst since the great depression of the 1930’s, the bonus smoothing reserve has been drawn upon to support the 2009 increases.”

On its older Platinum Pension product, Old Mutual has declared a pension increase of 8% for 2009 for its top category, which has a 3.5% pricing interest rate. This is slightly below the 9.5% inflation rate as at 31 December 2008. Over a five year period, Old Mutual has delivered an average pension increase of 9.5% o­n this Platinum Pension category, well above the average inflation rate of 6.2%.

On the newer Platinum Pension 2003 product, which has been open to new business since 2003, Old Mutual has declared a pension increase of 2.5% for the 3.5% pricing interest rate category.

Pascoe explains that the reason for the lower increase o­n the newer product compared to its older counterpart is because it has had less opportunity to build a smoothing cushion for adverse times such as those experienced in 2008. However, he says that “viewed over a five-year period, Platinum Pension 2003 pension increases have done well relative to inflation, with the 3.5% and 4% pricing interest rate categories beating inflation over the five year period.”

He adds that it is also important to bear in mind that inflation is o­n a sharp downward trend and that the actual rate of inflation at the date of increase for the individual pensioners for 2009 is expected to be much lower than 9.5%. The Old Mutual Investment Group (South Africa) (OMIGSA) expects inflation to fall to within the Reserve Bank’s target range of 3% to 6% during the second quarter of 2009.

*Note: Please see tables below for pension increases o­n all Old Mutual Platinum Pension categories.

Pension Increase Expectations

Due to the investment strategy of the Platinum Pension portfolios, the assets backing Old Mutual’s with-profit annuities have not fallen as much as might have been the case with an aggressive equity portfolio. Hence the current Bonus Smoothing Reserves (which is the difference between the value of the assets and the value of the annuity liabilities) of all Old Mutual’s With-Profit Annuity portfolios are still within acceptable ranges.

“However, markets have declined further since 31 December 2008 and we therefore expect that there will be more pressure o­n the pension increase declaration at this time next year,” says Pascoe.

“It may well be that bonus smoothing reserves will have to go lower than current levels to support next year’s increases. Should markets recover, bonus smoothing reserves should recover and improve pension increases prospects.”

Old Mutual as a Guarantee Provider

The guarantees underlying With-Profit Annuities are o­nly as strong as the company backing them. Old Mutual South Africa continues to have the strongest balance sheet of all the South African life insurers.

Old Mutual South Africa retains its AAA credit rating, the highest rating available and the highest of any insurer in South Africa, and remains well capitalised.

“As at 31 December 2008, our capital was some 3.8 times more than is required by law,” says Pascoe.

He believes “pensioners have good reason to enjoy peace of mind. Their pensions are guaranteed for life, and will not decrease. Assurances like these go a long way to reducing the uncertainty caused by the international credit crisis.”
*2009 Platinum Pension increases – all categories

Old Mutual has approved the following Platinum Pension and Platinum Pension 2003 pension increases, effective for increase dates from 1 April 2009 to 31 March 2010.

The tables also include a comparison of the pension increases against CPI over the last five years, for the longer-standing profit categories. These show that increases o­n most categories have performed well against inflation for the five years ended 31 December 2008.

Platinum Pension Portfolio

1. Applicable to Platinum Pension annuitants o­nly.
2. Year-on-year CPI as at 31 December 2008.

Platinum Pension 2003 annuity portfolio

1. Applicable to Platinum Pension 2003 annuitants o­nly.
2. Year-on-year CPI as at 31 December 2008.