Edition: April / June 2016


Market volatility presents significant risk for South Africans approaching retirement

Wynand du Plessis, product actuary at Old Mutual, discusses the smoothed-bonus way to avoid disappointment.

The volatility in global markets and talk of a possible recession in South Africa means that many local investors run the very real risk of retiring at a time when the value of their retirement funds are below their anticipated levels, thereby placing their financial security during their golden years in jeopardy.

Market movements can severely impact retirement investments. While these movements should be viewed with a long-term lens, the reality is that many retirement fund members are highly loss-averse. They donít have appetite for such uncertainty and risk.

These members donít tend to think of risk in sophisticated terms. They have a high expectation that what they put into their retirement savings, they will get out.

However, individuals retiring during this period of heightened market volatility and uncertainty could possibly experience a drop in the value of their investments. It means they are accessing their investments during a period when the value is much lower than they would have expected a year ago. Some of these investors donít have the option of delaying retirement and waiting for the market to stabilise and for returns to normalise.

Risk aversity

The Old Mutual Smoothed Bonus Customer Monitor 2014 found that most retirement fund members are uninformed and disempowered when it comes to their retirement savings. Approximately 90% of members arenít aware of whether their investment fund protects them against such volatility.

Findings from the Monitor also reveal that 80% of respondents, across all age groups and income levels, are highly loss-averse. They are likely to become very concerned if they experience even a small 5% loss of retirement savings over a one-year period.

The majority of respondents (63%) also indicated a preference for a retirement investment which delivers stable returns, even if slightly lower.

Retirement fund investors looking for these requirements should consider a smoothedbonus fund which levels out the returns from one period to the next so that investors are less impacted by market volatility. This is a particularly valuable feature when market volatility reaches the levels experienced towards the end of 2015 and that we continue to experience currently.

If a member seeks protection against volatility, he or she will feel more comfortable with consistent positive returns.

All retirement fund members desire a secure and comfortable financial future. However, the uncertainty of a high risk / high return investment option often cripples investors from either choosing the correct long-term investment, or even having one at all.


One of the biggest risks to any investment is emotional decision-making. Research done by behavioural-finance experts has shown that a lot of people donít achieve their investment goals because they make bad choices when they see their investments suddenly drop or rise in value.

Retirement fund investors need proactively to manage their investment risk by making use of the various protection mechanisms available. Members need to determine whether they should take risks in order to give them the long-term growth that they need, whether they should invest conservatively and forfeit the higher growth, or strike a balance between the two.

To provide peace of mind, investors need a stable and resilient long-term investment vehicle that will smooth out turbulent times, such as through a smoothed-bonus fund. Based on past experience, smoothed-bonus funds have performed well despite uncertain market conditions as they have the ability to manage the effect of market forces by using sound smoothing methodologies and underlying investment strategies.

Old Mutual Smoothed Bonus Funds, for example, have never declared a negative bonus since their inception in 1967.