Issue: December 2011 / February 2012
Expert Opinion

Protecting retirement funds in the age of turbulence

Bekker . . . practical steps
Bekker . . . practical steps
Stick to your guns, advises OMAC Actuaries & Consultants head of investment consulting Windall Bekker.

The past few weeks have seen significant market volatility both locally and abroad, leaving many retirement fund trustees and members in a state of confusion as to what steps they should take to protect their retirement savings.

Some of the factors that contributed to the market volatility include the decision by the US Government to raise its debt ceiling, the US rating downgrade by Standard & Poor’s rating agency and significant concerns across the Eurozone about debt defaults and bailouts for euro land members.

During times of extreme volatility and uncertainty it is helpful for trustees to understand and follow these steps:

•   Understand your fund membership

Trustees should have a detailed understanding of the fund members they represent. This includes age, gender, accumulated credits and contribution rates. Trustees also need to be clear on what the target replacement ratio is and what the effect of changing various factors will have on the replacement ratio. These factors include age to retirement, changing contribution rates and different investment objectives.

•   Clearly define the fund investment objective

Trustees need to be clear what the investment objective of the fund is in order to achieve the target replacement ratio. The investment objective is usually defined in terms of a return above inflation.  Inflation rates and increases in inflation therefore have a significant effect on the fund’s ability to achieve the target replacement ratio. For example, as inflation increases so the target investment objective above inflation needs to increase in order to reach the target replacement ratio.

•   Clearly define and understand the fund’s investment strategy

The fund’s investment strategy is the long term strategy that will enable the fund to achieve the investment objective that will result in members reaching their target replacement ratio. It is extremely important that trustees understand that the investment objective and fund strategy are long term in nature while market volatility and extreme events are generally short term in nature. It can be helpful to communicate investment philosophy such as “defend against losses, benefit when markets rise”.

•   Monitor the fund performance

Trustees should monitor the fund’s performance on a consistent basis against the investment objective and peer group. Trustees should expect periods when the fund exceeds its investment objective as well as periods when it lags the objective.  Trustees should have a clear communication strategy to members, keeping them educated about the long term nature of the retirement fund’s investments as well as the reasons behind any shortfalls against the objective in the short term. Trustees should also communicate more regularly with members during periods of extreme events, explaining to members what is happening, outlining the consequences for the fund and reminding them of the long term nature of retirement fund investing.

New offshore partnership opens opportunities for SA fund industry

OMAC Actuaries & Consultants has entered into a cooperation agreement with CAMRADATA Analytical Services, a leading London-based provider of institutional investment information in Europe and North America.

Windall Bekker, head of investment consulting at OMAC, hopes that investment-product providers will welcome this initiative by completing appropriate products in the CAMDRADATA database: “By doing so, they’ll create efficiencies that will benefit the whole investment industry.”

In addition to sophisticated analytical tools, the database provides an in-depth overview of an individual fund manager’s performance against its peers. Based on accurate data from a variety of asset managers, it assists pension-fund consultants and trustees to make better-informed investment decisions.

Asset managers use the software to collate information onto a central system, thereby creating a global knowledge-base accessed by more than 80 consultancies and 300 pension funds around the world.

“Our agreement with COMRADATA represents an excellent cost-saving opportunity for the industry as users are able to streamline their reporting and tendering processes,” Bekker explains.

The agreement will enable OMAC to enhance significantly its offshore investment manager and research capabilities. It will also be allowed to access and distribute a co-branded database of fund managers.