Edition: March - May 2015

Income and age don’t affect attitudes towards retirement-fund risk, a new report finds.

While conventional wisdom suggests that there should exist a significant variation amongst people of varying ages and incomes when it comes to attitudes towards risk of their retirement fund assets, a new study by Old Mutual Corporate has found that there is in fact very little difference in this regard across these demographics.

The Old Mutual Smooth Bonus Customer Monitor, which surveyed over a 1 000 South Africans older than 18 who are currently contributing to a pension, provident or preservation fund, was conducted to understand members’ risk attitudes and retirement-income return preferences, as well as the underlying reasons for these preferences.

Old Mutual Corporate says that any bias that would be expected towards risk aversity by age and income levels does not seem to manifest in the group of fund members surveyed. There was a similar level of concern amongst members across all age groups and income levels about a loss in asset values.

The report reveals that most members are highly lossaverse. No fewer than 80% of respondents indicated that, if they experienced even an ostensibly small loss of 5% of their retirement savings in a single year, they would become very concerned.

In terms of the attitude towards risk by age group, more than 80% of people in the age group 18-30 years and the age group 31-40 years expressed a concern for a 5% loss, while 75% of the age group 41-59 years and 78% of the age group 60+ expressed concern. The only drastic difference in response was in the age group 60+ where nearly half (47%) were very concerned about a 5% loss of asset values.

The attitude towards risk, by income groups, was also surprisingly evenly split. 80% of respondents earning less than R20 000 per month are either concerned or very concerned about a 5% loss in asset value. 83% of respondents earning between R20 000 and R40 000, and 76% earning more than R40 000, express the same sentiment.

Graph 1 Attitude towards risk by age oldmutual-graph-1
Graph 2: Attitude towards risk by income oldmutual-graph-1

However, despite the majority of members being very risk-averse, the findings reveal that they are still attracted to returns above the low-risk and safe option. There is a significant overlap between downside aversity and a need for growth exposure. 63% of respondents stated they wanted a medium level of investment risk and medium investment return as their risk/return preference, and 17% wanted a high-risk/high-return preference.

Aitchison Aitchison . . . better understanding

Once again, a medium-risk/medium-return preference was mirrored across all age and income groups.

Craig Aitchison, General Manager Corporate Customer Solutions at Old Mutual Corporate, says that from a retirement fund context, the preference of a medium risk and return investment strategy displayed by respondents matches the value proposition of a smoothed bonus fund, or an absolute return portfolio:. “A smoothed bonus fund seeks to provide access to growth asset classes, while reducing investment return volatility. These products trim the extremes from the peaks and troughs of the market, and give the investor who is risk averse some level of comfort in investing in assets that can give them higher real returns in the long run.”

Respondents were asked about their attitudes towards smoothed bonus., and 56% of members understood the basic concept of smoothing of returns after being presented with an example. If offered the opportunity to invest in another retirement fund, 50% of members were likely to invest in smoothed bonus. “The reasons attributed to this decision were that the fund “seems to have high growth potential” (27%), it is a “safe fund option” (20%), and it “suits my needs and is a good product” (13%).

“While the members in the report have a strong stance on the returns they seek and the risk they are prepared to take to obtain this, the majority of members (80%) surveyed acknowledged not being very knowledgeable about their retirement fund savings. Their attitudes to smoothed bonus therefore suggests that with some level of financial education, members can have a high level of appreciation of how these funds works, and how they can impact their retirement savings,” concludes Aitchison.

Graph: Risk return preferences oldmutual-graph-3

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