Issue: June 2012 / August 2012
More to life
With reference to Brandon Furstenburg’s article on living annuities (TT March-May), I’d like to add another dimension to what he has done so well.
There seem to be two schools of thought with living annuities:
These stem from two very different beliefs. The first assumes that you can plan for the number of years that you will live to draw your pension. The second assumes that nobody knows how long the longer-living of the couple will live. As yet I have seen no work on what happens with living annuities where there is a significant age difference between spouses.
If you subscribe to the first belief, the Optimists, then it’s easy to plan because you have a definite goal. Clem Sunter once said: “The trick about retirement, as I understand it, is to make sure that the money lasts as long as you do.” And if you believe that you can estimate for how long the money is required, then the rest is nothing more than a set of calculations. No worries!
The second group, the Pessimists, believe that nobody knows how long they will live and that their living annuities should be managed as though for infinity.
The different beliefs still need good investment returns and low costs.
Optimists believe that the better their investment grows the longer the pension will last before reducing. Pessimists know that their annual increases will depend on how well their funds grow. In this, costs are a hugely important factor.
I subscribe to the Pessimists’ viewpoint and suggest that precise modelling is impossible. The only safe way is to treat the product as though it needs to last forever. In other words, growing capital is paramount.
If the returns needed to maintain a pension at a particular level are high, this may put a pensioner at risk. It is important to know what gross returns are needed to see what risk is involved.
If, for example, a net annual return of 8% is required, the gross return required will depend upon the costs that are actually charged. Because costs are charged as a percentage of the entire capital of the investment, they can be simply calculated.
Assume that you need 8% real growth annually as a net investment return, the calculation to work out the gross will look like this:
So costs can make a huge difference to the required return.
Trustees are not often reminded of the transition risk faced by fund members at retirement. Members of retirement funds get the benefit of wholesale investment charges. Once members step out into the wide world beyond retirement funds, they are fair game.
Their insecurity often prompts them to opt for people who offer them comfort but who charge a relatively high fee for doing so. Nobody can offer certainty of investment performance, but it doesn’t prevent many advisors from intimating that they can. It should be taken pretty much as read that the future is a closed book to all.
Costs, on the other hand, can be controlled. If one understands the cost relationships, it is not difficult for retirees to self-protect themselves in this area by “being difficult” about costs.
How do they learn about this? Perhaps teachers independent of sales organisations can help people prepare themselves properly for approaching retirement.
-- Dave Crawford CFP, Crawford Individual Financial Perspectives.
Until recently I was a member-elected trustee and principal officer of a relatively small defined-benefit pension fund. Its management board comprised three employer-nominated trustees who all were non-executive directors of the employer. The remaining three trustees were elected from amongst the fund members.
During December 2011 a vacancy arose for a member-elected trustee. As principal officer, I called for nominations and copied my fellow trustees. One fund member nominated a lady who then happened to be my fiance.
The chairman of the management board, who was an employer-nominated trustee, sought to discourage this nomination. He communicated directly with the member concerned and inferred an improper relationship.
I confronted him that there would be no conflict of interest (as she, like me, would be a member-elected trustee), and I reiterated that full disclosure of interests should be made at the next meeting. It had come to my attention that the chairman had not disclosed his interests in various asset managers to which we, as a management board, were considering moving the fund’s assets.
The chairman launched into a personal attack on my character and threatened my continued employment with the employer. He also copied the acting chief executive of the employer on the correspondence. I reiterated that I was performing my functions as a trustee and principal officer, and that I would not be bullied into not fulfilling my mandate as entrusted by members. As a result of this exchange, the acting chief executive officer suspended me from work.
To cut a long story short, I took up the matter with the Financial Services Board where I laid a complaint against the employer and the chairman of the fund’s management board. I agreed that the FSB could submit a copy of my complaint to the employer-nominated trustee for his response.
When the complaint was received, the employer preferred disciplinary charges against me. They included being insolent to a board member of the employer (ostensibly the chairman with whom I had interacted in his trustee capacity). I was also charged for laying a complaint with the FSB, which I was duty-bound to have done in terms of the Pension Funds Act.
In my complaint I had raised several issues that I thought pertinent for FSB investigation. Amongst them were the interference of the employer-nominated trustee into the voting procedure of fund members to elect trustees; the employer-nominated trustee’s abuse of power by taking the matter into the employment arena where he could leverage authority over a member-elected trustee, and employer interference in a matter that arose only between the trustees.
To my shock, in February the FSB legal advisor responded that the issue was primarily a labour dispute and that the FSB consequently had no jurisdiction. He also stated that, in the employer trustee’s response, the point had been raised that my exchange with the chairman (in the scope of my duties as principal officer) had taken place during office hours. This apparently supported his view that it was thus an employment and not a pension funds issue.
Later in February I was summarily dismissed from my job without a hearing having been convened.
When I attempted to appeal against the FSB decision not to become involved – my contention being that it was fundamentally a pension fund issue -- a long rigmarole followed about condonation for late filing of the appeal. But the clincher then became the FSB retort there had been no “decision” but only a “view” of its legal advisor.
So, because the FSB was also of this “view”, it stood by its “decision” that there was no “decision” to appeal against.
Attempts to decipher this bureaucratic babble have been fruitless.
-- James Ellis, Johannesburg. (This letter has been considerably edited and shortened – Ed.)