Issue: March/May 2008

Speed bump

What can Trustees expect in 2008 with regard to the ever-changing Pension fund environment?

Leon Mostert
Head:Absa Consultants and Actuaries

The only certainty about 2008 is that it will be a challenging and ever-changing landscape for employers, trustees and members alike. The one threatening factor evident in everybody's lives is the pressure of inflation threatening to remail above 8%. This should take its toll on consumers, not only on the purchasing power front, but also with the possibility of further interest hikes, commented Leon.

2008 therefore kicks off with a negative undertone that will certainly make it visible on the following fronts:

  • Volatile Markets

On the international front the sub-prime debacle in the USA caused huge uncertainties and concerns during the last quarter of 2007. This spilled over to other financial markets, clouding the prospects for the international economy. Only sound economic fundamentals and an aggressive decrease in interest rates will prevent the USA economy ending up in a recession. From a fund and member perspective, this volatility might lead to less stable markets resulting in less favourable returns on investments than expected.

  • Increased consumerism

Experience tells us that members have an increased awareness in volatile markets. Trustees have an increased awareness in volatile markets. Trustees can therefore expect members to question investment strategies and the choice of portfolios provides by the Trustees in conjunction with their consultants/advisors. In this regard it will it will be the duty of the Trustees to remind the members of the long-term nature of their investments and not to change these due short-term volatility but to base their decisions on their long-term risk/return profile!

  • Increased compliance measures

During a period volatility in the markets and increased consumerism, the focus shifts towards compliance. We saw PF 130 seeing the light during 2007, providing Trustees with guidelines to the establishment of various policies, such as on Investment Policy, Risk Policy, Gift Policy, etc. Trustees who have applied their minds to establishing these policies will reap the benefits thereof during 2008.

  • Increased focus on retirement fund reform

In 2007 we saw the release of the Second Draft Reform Paper released by National Treasury. In 2008 we can expect an increased focus on reform. During a workshop held in December 2007, Treasury expressed its concern for the high number of funds in South Africa (approximately 14 000) and the need to decrease these to approximately 100 large funds to ensure economy of scale.

Volatile markets and consumerism will support these views as costs of retirement provision come under pressure due to less favourable returns on investments.

"Trustees can expect a bumpy ride for 2008. However, the important message is not to overreact! This is not the first time there has been volatile markets. Every few years we see the cycle repeat itself. For a couple of years we see huge positive returns in the markets with positive investors getting ahead of the markets. This is normally followed by a "crash" in the market which is nothing but the market adjusting to a reasonable level."

Leon concludes by saying; "I therefore think that 2008 will be a tough year, but also see the positive of markets gaining momentum in the years to follow".