What’s inside your pension investment portfolio?

We recently covered the different Default Regulations we have on pension and provident funds in a detailed Twitter thread. You can check out here. One of these, Regulation 37, deals with Default Investment Portfolios, which basically say: every pension and provident fund must have a default investment portfolio for their membership. 

Right now, you’re thinking AMC, GameStop, Dogecoin & a portfolio filled with penguin NFTs. While we have nothing against pudgy penguins, arriving at an investment portfolio designed to see you through to retirement requires a bit more diligence.

The investment portfolio must be in the best interest of members, and is a strategy which is designed by the Board of Trustees, together with the appointed service provider/s. In terms of investments, the service provider would be the asset manager, providing professional advice to the Board.

Based on the advice, and review of the market by the professional service provider/s, the Board of Trustees will approve a default investment strategy for the Fund. It gets a thumbs up from all the Trustees, and is reviewed annually, to ensure that the strategy still works for the membership.

This strategy forms part of the Investment Policy Statement, or you will hear them call it an “IPS”. What is that? Well, THAT, contains the strategy of the Board, which provides the blueprint of the investment strategy and how that strategy is put together.

With the IPS, the Board (ultimately responsible), lays out the framework of the investment strategy, considers various risk aspects (think, credit risk, liquidity risk, conflicts of interest, and many others.) and combined with the history and fund specific information, the Board will put together the strategy for the fund.

Most of the time, that default investment strategy is a life-stage model. Below are two sets of questions, one relating to stand alone funds, and one to umbrella funds, and how many funds use a life-stage strategy as their default strategy: (Credit to the Sanlam Survey for 2021, in providing this information).

Stand Alone:

Umbrella Funds:

As you can see, the majority of funds use a life-stage strategy in their pension/provident fund.

So, what does this mean? How does this help you? Well, as usual, at BankerX, we help you see the light.

1) If you have never made an election on where to invest your money, in your pension or provident fund, you are invested in the default investment strategy - that is the gospel truth.

2) How does a life-stage model work? Simple, follow the trail below:

Essentially a life-stage model would have the above structure. It would invest for growth (high equity) when a member is young and as per the above model, 7 years prior to retirement, they would start moving you from a growth portfolio, to a moderate/balanced portfolio and then into a stable/conservative portfolio within the last 2 years prior to retirement. They call this de-risking, slowly moving you from one investment portfolio to the next.

It means that, as a member of a Fund, the closer you get to retirement, the more conservative in nature the asset manager will be in investing your money. In GenZ speak: “you get old, no YOLO meme stonk on hopium!”

The Board certainly does not want to take a chance with your retirement money, in high-growth assets, with a market that could meltdown - especially without knowing your risk profile and personal circumstance. Therefore, if you want to change your investment strategy at any stage: (if you are allowed - ask your Fund)

SPEAK TO AN INDEPENDENT REGISTERED FINANCIAL ADVISOR, yes, I said it again!

If you aren’t sure, don’t want to pay a financial advisor, then leave your money in the default. It was approved by the Board, it is recommended as the default strategy, tabled by professionals and reviewed annually. What more could you want!

Just remember, your pension/provident fund won’t give you enough money alone to retire with! Reality check - sorry! But it is the start you are looking for, as you must consider what will happen later in life - yes you don’t think so, yes, we’ll chat again in a while… wink

So, each of these strategies perform in the market, they are measured against their peers (fancy word for colleagues in the investment industry) and measured against an internal benchmark.

Below is an example of how this is reported:

So, the above extract breaks up the 3 different portfolios, being growth, moderate and stable (always gross of fees - therefore, fees still need to be deducted).

The top line of each portfolio shows you the returns made by the asset manager, the second line the peer group return and lastly the benchmark. The first two are pretty similar, however, the benchmark is measured against inflation and generally the benchmark will also take place over a rolling period. In the case of a CPI + 5% investment portfolio, that period would be a rolling 5-year period, for a CPI + 3.5% investment portfolio, it would be measured over a 4-year rolling period, and a CPI + 2% investment portfolio would be measured over a rolling 2 year period. Each one differs from provider to provider - so find out and ask questions.

Let me explain - Let’s take the “Growth” portfolio. They talk about CPI + 5% as the benchmark, which tells you as an investor in the fund, that the asset manager is trying to beat/outperform CPI (inflation) by 5%. So, if inflation is 3.5%, then the asset manager is aiming to give you as a member a return of 5% + 3.5% = 8.5%. This would be achieved over a 5-year rolling period 

Therefore, some years you could have negative returns and some years positive returns, as long as the asset manager hits the 8.5% return (annualized) over a 5-year rolling period.

From the above, it again ties in with what Mr. Swales (hats off Sir) discussed in his thread, stating you need an objective. You can check it out here. So, growth will have a long-term objective, while a stable/conservative investment portfolio would have a shorter time frame, as noted above - 2 years.

Retirement funding is very long term, therefore we say you need to invest for growth, as much as possible when you are young, to build your wealth. Cash investments with a 30-year time horizon will do you no favors - you must beat inflation to make money, it is that simple.

So, you can see the asset managers provide for a benchmark and work towards achieving that benchmark and outperforming peers at the same time. 

Lastly, the above example can be used for any investment. When you invest in a portfolio, you can ask for a Fund Fact Sheet - which provides you with the same information as above for the specific portfolio - and tons of other info you might want to tuck into! Check every detail, including the effective annual costs!! You are welcome! Very useful.

You need a strategy to execute performance. Again, markets can be both negative and positive, up or down, volatility, whatever you want to call it, but if you invest for retirement, know that your timeframe should be long, you should invest LONG, and is also the reason you should rather transfer your benefit, than claim it in cash and pay tax. You lose all those years of savings! You’ll thank me later!

3) If you don’t understand investments, if you don’t want to speak to anyone about investments, or you are unsure of yourself, then the default is your home. A strategy, approved, implemented and reviewed annually by the Board of Trustees. They all have a duty to look after the members, and work with service providers to help achieve that goal - you're in good hands.

4) Investing, understanding your pension or provident fund can be daunting, and straight up scary! If you feel that you are not equipped to make investment decisions, use the default, it is why the Regulation was created.

It further ensures that you are invested in a solid strategy, which is based on research and fact, delivered by professionals in the market, which is then approved by a Board, who has a duty to you as a member.

Investing in your Default Investment Strategy is a good choice to have. Use it! If you want to opt-out of the default, if allowed, then make sure you had professional financial advice and completed a switch form.

Enjoy the journey, and remember it is long term!

It is a YAY!

How do you feel after reading this?