Issue: Oct 2010/Jan 2011
Back to Basics 2
Mind the gap
Burger...a concrete example
Rowan Burger, head of investment strategy at Libfin, explains the difference between investment and fund performance.
A pension-fund member recently complained, near the completion of his five years of service, that he had not recovered the total contribution paid into the fund over what is deemed to be a sufficiently long period. The immediate blame was attributed to poor investment performance.
But now deconstruct the return from the investment portfolio to the member. This is instructive because it helps to understand why there is a disconnect between the fund and its members.
The lesson for all in the pensions-service industry is that we will think that we are delivering in fund members’ best interests. But the lack of financial understanding will lead many members to be disillusioned about the performance of their pension funds, and many trustees might be oblivious to this reality.
Actual case study
Let’s consider a R4 000 per month contribution (15% of salary) to a defined-contribution fund. The member had presciently selected a ‘moderate conservative’ portfolio for the past five years. The total contributions of R240 000 yielded a benefit value of R239 380 on 25 June 2010 (accessed online). The effective internal rate of return for the member was a negative 0,11%.
So where is the disconnect and to whom do the trustees turn?
The drag on performance is explained:
Premiums required to secure death benefits are deducted from members’ contributions prior to these being invested. To forget this probably causes the most common misunderstanding that leads to member unhappiness. This expense is often blamed on the administrator.
Some useful advice
Ideally, when communicating performance to members, trustees should include some form of money-weighted return. But bear in mind that, because each member has a unique starting point and salary-increase profile, no single number applies to all.
A sound understanding of the fund and its charges is imperative. So too is an understanding of how the investments deliver performance.
Proper communication of investment performance is key to ensuring reasonable member expectations.