Factors such as the recent inflation hikes and market volatility could have a significant impact on South African pension funds. In order to protect their retirement lump sums from these potentially erosive factors, local pensioners are urged to use specialised investment tools to safeguard their future nest egg.
This is according to Roy Stephenson, Annuity Actuary at Old Mutual Corporate, who points to the South African Volatility Index (SAVI) which increased by more than 50% during the second quarter of 2010, indicating dangerous levels of volatility for pensioners. “It is here where the benefits of inflationary protection and smoothing returns from year-to-year become even more valuable to pensioners, because they are shielded from excessive market volatility,” he says.
Stephenson recommends selecting investments tools that enable pensioners to share in the investment returns made on the underlying annuity portfolio by way of annual increases to their pensions. “The aim of these products is to provide annual increases to help combat the negative effects of inflation,” says Stephenson,
As an example of the effectiveness of these tools, Stephenson highlights the Old Mutual Corporate Platinum Pension 2003 With-Profit Annuity which recently declared positive bonuses across all of its pricing interest rate categories (see table below). The announcement, marks eight unbroken years of positive bonus declarations and is effective for increase dates from 1 April 2011 - 31 March 2012.
Profit Category |
Pricing Interest Rate |
2011 Bonus |
CPI |
1.5% |
1.5% |
4.0% |
3.5% |
2.5% |
2.5% |
3.5% |
3.5% |
3.0% |
3.0% |
3.0% |
3.5% |
A |
3.5% |
3.0% |
3.5% |
B |
4.0% |
2.5% |
3.5% |
C |
4.5% |
2.5% |
3.5% |
D |
5.0% |
2.0% |
3.5% |
Stephenson says that the 2011 increases on the Platinum Pension 2003 With-Profit Annuity compare well with inflation over the year, with increases on the lowest pricing interest rate categories matching inflation.
“Inflation has come down from the 6.3% year-on-year CPI inflation reported by Statistics South Africa at the end of December 2009. In light of this, the 2011 increases as set out above are a substantial improvement on last year relative to inflation,” he says.
According to Stephenson, the Platinum Pension 2003 increases for 2011 are 0.5% higher than last year in line with long-term increase expectations relative to inflation. Year-on-year Consumer Price Inflation (CPI) was 3.5% for the year ending 31 December 2010.
The average increase for the Platinum Pension 2003 profit category of 1.5% has also exceeded inflation over the past five years.
Pensioner Assets underlying the Platinum Pension 2003 pensions are invested in a balanced portfolio of assets, with local and international equities together representing 30-40 percent of the total asset portfolio depending on the pricing interest rate category.
Stephenson says local equities, in the second quarter of 2010, performed consistently with the global theme of improved market conditions, with most international markets generating positive returns over the period. However, he warns that the improvement in the equity market was accompanied by very high levels of market volatility.