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Old Mutual Survey indicates Absolute Return and Smoothed Bonus products set to gain favour amongst retirement funds

11 June 2008 Old Mutual

While funds have enjoyed good Return on Investments in recent years, the economic tide is turning and the downside risk of investment market volatility has increased, interest rates are rising, and the cost of providing benefits is on the rise.

The impact of these environmental factors on the attitude of retirement funds towards investments are reflected in the findings of the 2008 Old Mutual Retirement Fund Survey, which suggest that protection strategies, such as smoothed bonus and absolute return products, are set to gain favour amongst retirement funds as they spread risk and aim for long term consistent returns.

Results from the survey show that 6 out of 10 funds see room for smoothed bonus products in a life-stage portfolio, while 40% of funds interviewed are willing to pay a premium for capital guarantees.

47% of funds interviewed are aware of new generation protection strategies such as the Absolute Growth Portfolios from Old Mutual, but only 10% currently invest in them. A further 16% have considered investing in these new generation protection strategies.

59% of funds agree that there is room in the market for smoothed bonus products in a lifestage, while 21% say no and a further 20% have no opinion.

"Higher market volatility and inflation are all resulting in a growing need by both retail and corporate investors for investment products that can provide returns in line with inflation linked and offer some sort of capital protection", says Trevor Pascoe, head of investment services at Old Mutual Corporate,

Pascoe says many retirement funds believe in smoothing as a concept in preference to other methods of achieving capital security, such as investing in cash. "Smoothing does not impair returns unlike other strategies that invest in the 'lower risk' asset classes."

He adds that the resurgence in popularity of smoothing is also due to the launch of new generation products which have greater exposure to growth assets, well defined bonus philosophies encapsulated in disclosed bonus formulae and transparent disclosure of smoothing reserves, underlying asset returns and costs and charges.

Rise of Member Level Investment Choice

Another notable trend highlighted in the survey is the continued rise in popularity of retirement funds offering member level investment choice (MLIC), as Trustees seek to provide members with more control and choice over their retirement savings.

According to the findings in the survey, 36% of all funds interviewed offer member level investment choice compared to 28% in 2006. Of the funds surveyed, all the funds which offer MLIC are either Defined Contribution funds (43%) or hybrid funds and primarily medium to large in size.

The survey also shows that the number of choices offered to members varies greatly between funds, with some offering as few as 3 and others more than 10. Five of the larger Defined Contribution funds interviewed have actually increased the number of choices available to members in the last few years.

11 of the employers participating in Umbrella Funds that were interviewed offer MLIC, with 9 of these offering up to 5 choices, while the others offer fewer choices.

According to Pascoe, an interesting statistic that Trustees should be aware of is that despite being offered investment choice, it is estimated by respondents that approximately 80% of members use the default investment option.

"When members are opting for the default investment option, trustees of funds have a responsibility to ensure that such a default option adequately meets the needs of the largest possible percentage of those members. In most cases, this means providing some form of protection. Trustees also have a fiduciary responsibility to be regularly evaluating this default option according to any changes in the demographics or average life stages of their member base," Pascoe concluded.

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