Pensions — too soon to panic

2008-10-10 00:00

Although many older South Africans have been gripped by panic in recent months as pension values slide by as much as five to 20%, asset managers, financial advisers and institutions have cautioned against knee-jerk reactions to the market turmoil.

Equities across global stock exchanges, including the JSE, have crashed over the past few weeks.

However, it is ultimately the extent to which one is exposed to equities that is the telling factor.

Clients who do not plan to retire within five years should not be concerned with a drop in pension values as the fund will have sufficient time to recover.

Real returns (which remove the effect of inflation) have been tremendous over the past few years due to a bull market.

Tobie van Heerden, head of institutional business at Investec Asset Management, said members benefited from real returns of between 15% and 18% in recent years. “Normally, real returns of five to seven percent are good numbers.”

He believes that the impact of the current turmoil will only be truly understood by members once they begin to see their annual portfolio statements.

Megan Butler, head of research at Old Mutual Actuaries and Consultants, said the impact on funds will depend strongly on what they were invested in — and how investment returns are added to members’ accumulated funds. “Most smoothed bonus products have not produced any negative returns so while the member’s money may not have grown, it is unlikely it would have shrunk either”

This product holds back returns in “good times” to boost returns for investors when markets perform badly. Likewise, a defined contribution fund has the effect of smoothing out any volatility. However, market-linked products that do not have smooth returns may have lost up to 10% during September, Butler said.

Wynand Venter of Wynsam Wealth said most funds that use a life-stage investment model will have a plan in place that entails “switching” members close to retirement into a defensive strategy, with a far lower weighting of equities. In any event, he recommends that people delay retirement for as long as possible — for their financial, psychological and emotional wellbeing.

Former financial planner of the year and director at Consolidated, Craig Kiggen, said the reason people are fear-stricken is that “their retirement portfolio looks very different to what it should look like at retirement”.

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