Issue: September/November 2008
Life after DB
Advances in technology have made it easy for members of modern-day DC pension funds to keep on top of their investments. Liz Still, editor of the Equinox.co.za website, discusses the background and indicates why the site is now urging fund members to retain a long-term perspective.
Much was wrong with defined benefit (DB) pension funds. It was difficult for members to calculate the value of their pensions, ascertain the underlying investments or calculate the management fees payable. Most DB funds were neither flexible nor easily portable, which made for expensive layers of administration.
In addition, as benefits were usually expressed as a percentage of salary for a designated period just before retirement, multiplied by years of service credit, it was possible for senior managers to manipulate the payout formula to their own advantage. Younger members were disadvantaged as DB strategies were not tailored according to risk profiles, possibly resulting in too-conservative mandates.
Trade unions were partly responsible for the move away from DB to newly-created defined contribution (DC) funds. The move was initially opposed by employers who possibly resented the shift in power. But as it dawned on them that the switch from DB to DC enabled them to escape the balance sheet risk of investment underperformance and huge liabilities, they realised that they’d be the net winners.
Since the 1980s, pension fund products have become more sophisticated. There’s sharper focus on the individual. Fund members can control their contributions,
select the underlying asset allocations and share portfolios, and daily track the value of their fund’s assets.
Is this a good thing? In some cases individual members, advised by consultants, have contributed to destruction of their fund’s assets. When members are poorly equipped to handle the investment freedom, the DC model doesn’t necessarily work in their favour.
Equinox appeals for a longer-term investment philosophy when choosing funds. Equinox Retirement Annuity members can choose from a wide range of prudentially-managed collective investments. Fund members can use the Equinox website to select the most appropriate fund or combination of funds, then monitor their performance as often as they want.
The website allows asset managers to communicate directly with clients by way of investment briefings and opinions. There is a thirst for relevant investment information, not always easy to assess in the media noise, so we provide a platform for views which help investors see beyond short-term volatility.
For instance, in August when market volatility was exceptionally high, we offered a series encouraging investors to look beyond the short term: Investec’s Jeremy Gardiner outlined causes for optimism; Allan Gray’s Johan de Lange explained how behavioural finance can be used to invest without emotion; Alphen Asset Management’s Adrian Clayton wrote about his aversion to momentum trades.
At Equinox, we value such contributions. They’re intended to stimulate investors, not to sell products, and trust that readers will find them valuable for this reason too.
The straightforward message of our latest series is to invest for the long term. This typical strategy of the old DB funds, and one of their better characteristics, should not be lost on the DC funds where members’ array of choice can lead them into short-term temptations they might later regret.