Odds stacked against investment industry as Covid-19 hits pension contributions

The investment industry could face one of its toughest years to date in 2020 as people are losing their jobs and cashing out their pensions to survive, while companies are giving those who remain employed options to save less for retirement.

One of SA's biggest asset managers, Coronation Fund Managers, said while it is still early to assess the impact of coronavirus-related job losses on the industry, it is safe to expect that less money will be coming in. On the other hand, the industry will be at the mercy of the financial markets and praying that the bloodbath that took place in February and March does not repeat and wipe out value of companies fund and asset managers have put their bets on.

The lockdown effect

"South Africa has experienced low economic growth for the past few years. We've seen unemployment rise. All that now has been exacerbated by the impact of Covid-19," said Coronation CEO, Anton Pillay.

He said as more companies are announcing retrenchments, employees gain access to their pension funds and the number of people contributing to the country's overall savings pool is dwindling.

"There's the unemployment and the falling contributions, because what the lockdown has allowed people to do is, for the next three to six months they may not contribute to their retirement fund. That means we are not going to get flows or there will be a lower level of flows coming in from people who are still employed," added Pillay.

Shrinking savings pool

This expected slump in contractual savings comes as South African households have already been in a dissaving territory since 2018, meaning that after spending all their income, they go further to borrow or use past savings to fund consumption.

David Talpert, analyst at Avior Capital Markets said while it was difficult to quantify how fast the lockdown could accelerate dis-saving, it made sense that increased unemployment and lower GDP would lead to reduced savings and increased outflows from the asset management industry.

Karl Gevers, head of research at Benguela Global Fund Managers, said while retrenchments will spike withdrawals from institutional investors, retail savings will probably suffer too as people cash them out or stop putting money aside to survive the lack of income. 

"This, combined with weak markets, is certainly a big risk for asset managers as well as administrators and advisors. Generally, in the retail space one also finds that many clients pull their savings after poor performance, which is not always the best timing," he added.

The shrinking number of savers in the country as more people lose their jobs has been concerning pension fund administrators and the investment industry for some time now. Coronation said in the six months to March, it experienced net outflows – money that investors cashed out – of 3.8%, which Pillay said was in line with the industry and Coronation's experience in the previous comparable periods.

"Formal retirement fund market has really been in a net outflow situation for the last decade," said Pillay, as Coronation recorded another 11% decline in its assets under management (AUM) – savings that clients have given to Coronation to manage. Pillay said roughly over 7% of the fall could be attributed to the market movements.

Gevers and Talpert, however, pointed out that while the declined in AUM was exacerbated by sell-off in markets in March, Coronation had outflows of about R21 billion over the past six months and its cumulative outflows over the past five years exceeded R200 billion.

"So while outflows are slowing, clients have still been moving funds away from Coronation," said Gevers. "The positive for Coronation has been the slight increase in fee margin, on the back of better performance."

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