SA Retirement funds set for lower returns

Retirement funds in South Africa face a difficult time over the next few years with trendless markets, lower growth, high volatility and increased probability of losses all set to impact on their performance. As a result, the net effect will be that membe

This is according to Windall Bekker, Partner at Rezco Investment Group, who says the low return and trendless environment in investment markets is expected to continue for the next 3 to 5 years. “This assumption is based on our expectation of Europe being in a recessionaryenvironment, growth estimates from China being lowered and South Africa’s commodity-driven economy being negatively affected.

“We also believe that the South African country risk premium for investors is increasing on the back of, amongst others, increased corruption, labour market conflict, increased government intervention in the economy and infrastructure decay. This makes South Africa less desirable for overseas investors and has a negative impact on the economy.”

Bekker says that in order to mitigate the lower returns, members need to understand the current status of their retirement fund and ensure that they understand what their fund’s investment strategy is and whether that strategy is properly aligned to their investment goals.

“Members have a few options when considering their investment strategies. Firstly, they can choose a fund with higher returns and higher risk. This is generally more appropriate for members with longer term investment horizons who can take on more market risk and potential for growth with the corresponding higher risk.”

Bekker says there are a number of excellent funds that are still giving members returns significantly higher than the market is offering. “This does require some research on the part of the member, as they are generally offered by the boutique managers and are often not as well promoted as the big brand name funds.”

“Another option is to choose a fund with lower returns and lower risk. This is generally more appropriate for members with shorter term investment horizons who need to protect more at the expense of growth opportunities.”

He says a further option is to contribute more to the retirement fund in the form of higher member contributions and year-end bonus contributions; however, this needs to come at the expense of short-termconsumption and lifestyle.

“It is not just down to members to ensure their retirement fund is appropriate to meet their needs. For corporates offering some form of retirement funding option to their employees it is also crucial, in light of expected lower returns, to identify the best option.”

Bekker says there has also been a clear shift among corporates to umbrella funds rather than standalone retirement options. “The government has indicated that it wants to see a significant reduction in the number of retirement funds, with smaller funds forming part of umbrella fund structures. As a result, retirement funds will need to understand the umbrella fund market and which fund best suits their requirements.”

“With investment returns expected to slow sharply over the next few years, it is becoming increasingly important that employers obtain advice from independent consultants to ascertain their options and to engage and educate their members about the importance of maintaining, or possibly increasing, their contributions to guarantee a more comfortable retirement,” concludes Bekker.