Discovering peace of mind on your journey from pre-to-post-retirement

Transcription

1 Discovering peace of mind on your journey from pre-to-post-retirement Principal Officers Association seminar Twané Wessels 18, 19 September

2 Contents The journey from pre-to-post retirement Today s environment A new solution that provides new directions in growth and security o What is it? o How can it be provided for? o Benefits to Defined Contribution fund members o A comparison with existing solutions Alignment with the Retirement Reform Conclusions Questions? 2

3 3 Today s environment

4 Defined Benefit funds Defined Contribution funds Interest rates Investment return 4

5 Investment return volatility 120% ALSI rolling annual returns 100% 80% 60% 40% 20% 0% -20% -40% 5

6 Interest rate volatility 6 *Inet

7 Interest rate volatility trying to time the interest rate cycle is extremely difficult if not impossible. Managing the risk of retiring at the wrong point in the interest rate cycle is much better achieved with an appropriate investment strategy pre retirement (Letter from the Actuarial Society of South Africa to National Treasury, November 2012) 7

8 Speculation is the difference between a goal and a guarantee. (Momentum) 8

9 Impact of these pitfalls on your replacement ratio 85% Replacement Ratio 80% 75% 70% 65% 60% Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Illustrating the significant volatility in your replacement ratio, for no reason other than the time at which you retire; due to the impact of investment return in a balanced fund 12 months prior to retirement and changing annuity prices. 9

10 Impact of pitfalls on your replacement ratio: Alexander Forbes Pensions Index 10

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12 Existing pre-retirement investment strategies to fund for annuitisation Capital guarantees Suitable for living annuities (no longevity protection) But when we consider guaranteed annuities: provides exposure to the market (incl. equities) with higher expected returns; leading to a potential bigger pot of savings at retirement does not provide full protection against interest rate and annuity rate changes; the price of retirement income. Investment return Interest rates X 12

13 Existing pre-retirement investment strategies to fund annuitisation Matching bond portfolio Suitable for Inflation-linked or Conventional annuities But when we consider With-profit annuities: Provides protection against the price of retirement income does not allow exposure to the market (incl. equities) with higher expected returns; a bigger potential pot of savings at retirement. Interest rates Investment return X 13

14 Most adequate post-retirement investment strategy for the average South African? The average South African has a replacement ratio of less than 30%* and therefore we believe can t afford an inflation-linked annuity. In the latest papers released by Treasury on Retirement Reform, it is stated that the majority of South African s, 80% purchase living annuities which don t provide sufficient longevity protection. The most suitable post-retirement investment vehicle (in our opinion) is a with-profit annuity. Why? offers longevity protection targets inflation protection with higher exposure to the market (incl. equities) and therefore higher expected returns. 14 * 10X website

15 What is a suitable pre-retirement investment strategy for a with-profit annuity in post- retirement to provide protection against the pitfalls? 15

16 Is protection against both pitfalls of value? Consider the 2008/09 financial crises 85% Replacement Ratio 80% 75% 70% 65% 60% Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 16

17 Is there a pre-retirement investment strategy than can allow for BOTH a bigger potential pot of savings at retirement AND protection against the price of retirement income? 17

18 A new solution that provides new direction in growth and security 18

19 19 A retirement income guarantee

20 What is a retirement income guarantee? It allows members to build up an explicit, guaranteed post-retirement income with pre-retirement savings in a with-profit annuity. Guarantees your future, before you get there. For example o o o o Members buys units of income; 1 unit = R1 p.a. guaranteed lifetime retirement income; additional units allocated throughout the duration of the investment allowing for investment growth, expected to keep pace with inflation; giving them certainty for retirement. 20

21 How can a retirement income guarantee be provided for? Accomplished through a sophisticated liability driven investment strategy, in line with international best practice With-profit pension increase profile is equivalent to an option payoff profile It can be guaranteed in all market conditions by investing in an appropriate proportion of 21 o o Risk-free matching asset to meet the guaranteed level pension Assets offering higher growth to generate future pension increases

22 Example Assume: Cash, return of 5% p.a. Equity, return of either 10% or -10% p.a. 22

23 Example By charging a small option premium of R1.25 upfront; investing R73.80 in equity and R27.45 in cash; and by rebalancing the portfolio after one year we can guarantee the payoff profile required under all market conditions. 23

24 Example R73.80 * 1.1 = R81.20; R27.45 * 1.05 = R28.80 Total = R110 R73.80 * 0.90 = R66.40; R27.45 * 1.05 = R28.80 Total = R

25 Benefits of a retirement income guarantee to DC fund members Retirement Member can pre-purchase a defined guaranteed retirement income for life It provides a smooth transition into a postretirement with-profit annuity Provides members with peace of mind Pre-retirement protection against market and interest rate volatility Explicit targeting of net replacement ratios knowing your funding level No difficult member decisions required during pre-retirement last stages in a Life-stage Preservation funds 25

26 A comparison to existing solutions Feature Retirement income guarantee Capital guarantee Matching bond portfolio Guarantees pre-defined level of income X X Longevity protection X X Inflation protection Explicit targeting of replacement ratio X X Smoothing of investment exposure X Smoothing of annuity rate exposure X 26

27 The absence of guarantees means giving yourself permission to lose. 27

28 28 Alignment with Retirement Reform

29 Equip members to understand their readiness for retirement Knowing your funding level means knowing at any point in time whether you have enough money to provide you with the income you'll need once you retire. (Claire Densham; ITInews) 29

30 Encourage a pre-to-post investment strategy with an incentive to annuitise fund trustees should start to think about offering pre-retirement portfolios that attempt to make the transfer at retirement as seamless as possible. (John Anderson; Alexander Forbes) 30

31 31 Conclusion

32 Peace of mind on your journey from pre-to-post retirement In our opinion, the most suitable post-retirement investment strategy for the average South African is a with-profit annuity. No difficult member decisions Explicit targeting of a replacement ratio A retirement income guarantee provides protection against both investment return and interest rate volatility It provides a smooth transition into a postretirement with-profit annuity In line with Retirement Reform Guarantees your future, before you get there. 32

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34 Questions? 34

35 35 Thank you

36 Disclaimer The contents of the presentation, the remarks and comments made by the presenters does not constitute advice as defined in the Financial Advisory and Intermediary Services Act. Whilst all reasonable care has been taken in the preparation thereof, MMI Group Limited and its employees shall not be liable for any loss, damage (whether direct or consequential) or expense of any nature which may be suffered as a result of or which may be attributable, directly or indirectly, to the use of or reliance upon it. 36