Mathias Sithole: No one-size-fits-all – protecting retirement against volatility | Fin24

Mathias Sithole: No one-size-fits-all – protecting retirement against volatility

Jul 06 2016 11:49

A frequent concern among savers for retirement is how market volatility will affect their investment package, especially when one is close to retirement. Such questions emerge more frequently when there is extreme volatility, as we saw recently with the British referendum result in favour of leaving the European Union.

Mathias Sithole, Head of Public Sector and Corporate Consulting at Liberty Corporate, explains how protection is built against volatility. It’s important to avoid short-termism and to remain closely in touch with the risk profile of individual savers – there is certainly no one-size-fits-all solution. – David Williams

This interview is sponsored by Liberty corporate and I’m speaking to Mathias Sithole, who is the head of Public Sector and Corporate Consulting . Morning to you Mathias, the impact of market volatility when someone is close to retirement is always something I think people are concerned with. Of course, we have a recent example of great volatility in the markets, with the uncertainty caused by the British vote to leave the European Union. One does have to ask if you retire at the wrong time, as it were, or you retire at a time when there’s going to be a lot of volatility. Are you disadvantaged? How do you guys compensate for this?

Yes, thanks David for the question. I think in terms of the investment strategy close to retirement if you are in an inappropriate investment strategy you can definitely be negatively impacted by the impact of market volatility. What needs to be happening first for members close to retirement is that you need to get a well thought out investment strategy.

A well thought out investment strategy will mean the Board of Trustees for a Pension Funds, needs to avoid short-termism. So you need to know what you need to do in terms of setting up an investment strategy. You need to look at the objective and the risk profile of the members concerned. A common thing within the industry to try and counter the effects of market volatility, is what is called Life Staging, especially for defined contribution funds.

In Life Staging what you do is you start when the members have got a longer term to rely on, so other members that are still quite young, then they tend to be buying exposure to real assets that has equity. Then the idea that you then tend, reduce that exposure to real assets, as you get closer to retirement.

So if you are closer to retirement and have good exposure to know money market, to know things like cash and bonds then what has happened is the impact of volatility won’t be as damaging as when you’ve got a high exposure to real assets. Life Staging is one of the tools that we’ve used to try and then get the impact of market volatility.

Read also: What is the 4% Rule for Retirement?

Right, and talk about this Brexit. Obviously a business like yours you would have followed it very closely. How do you react when something like this happens? It can’t be ‘business as usual’ but on the other hand you don’t panic and change anything, so what do you do when there are unusual times, as have been caused by the Brexit?

Yes, if you look at the Brexit it’s not the first, especially if you look at the past two years we’ve gone through a lot of volatility. We’ve had the Greek bailout crisis, then we’ve had the Finance Minister being fired in this country. Then we’ve now had the Brexit, so all those things, if negative news like that comes onto the market then you expect volatility.

We as a manager of the funds, what you would call the fund for Retirement Fund members what we tend to try and focus on is to try and focus on being positioned in such a way that we avoid getting the impact of that volatility.

If you look at some of the portfolios that we’ve got there, we would have obviously gone conservative, to try negate the impact of that but then in addition to that it then comes down to saying ‘we look at its fund is a specific and a unique fund’, so what we need to do is you can be in a conservative position portfolio but as long as you are not in that portfolio you are not going to benefit.

So you need to look at the profile of each fund. If you’ve got a fund that has got members that are very young then obviously then, what you need to be looking at there, if you don’t have these negative things that is coming through you look at that short term. So what you need to look at is you need to look at what is in the long term.

Looking at the longer term then each one… What seems to be happening is a good, well thought out definite strategy. They should be able to write down the short term volatility, so that over the long term objectives that you set out and after addition, you should still be able to achieve. What’s also important is what you’ve come up with as well, is to look at it in terms of what are you going to draw post of retirement?

If you are going to go into a guaranteed annuity post retirement, then it makes sense to de-risk. In other words, you move away from real assets and more into cash and bonds, and you’ve got portfolios that do that but then if you are going to go into a living annuity then you obviously you want your growth, and what’s going happen there is you are still going to be invested in the market.

Then you can maintain your high exposure to real assets. What has to happen is if you know you’ve reached that retirement age, and because you are still going to be in the living annuity – you are still going to be invested in the market. You are actually, still exposed to the market, so if any volatility or short term volatility that you’ve got, you’ve got a longer period to be able to write down that volatility activity.

Read also: Will SA follow UK? Death of early retirement – more workers aged 50+ than ever before

What about, I mean as it happens I heard on the radio a product that your company advertises saying, “You want to know exactly how much you’re going to get when you retire?” I think this is a bit of a hankering back to the old defined, benefit days when you knew exactly what your pension would be. It wasn’t about investment returns or changing money from one fund to another. Whereas, now it’s largely defined contribution and then it’s invested. This promise that you are making about knowing what you are going to get when you retire, in other words, a defined benefit in effect. How do you manage that expectation and how do you shrug off the volatility?

That is exactly one of the reasons why we came out with that product was, what you correctly pointed, when he said, “Define contribution fund.” The day that you retire the employer gives you or the retirement fund pays you out a lump sum. Then from that lump sum you then go to the market to try and buy a pension.

Then the pension that you are going to buy from the market is depending on the annuity rates that are currently available.

If the interest rates are very low obviously, what’s going to happen is the cost of buying those annuities are going to be very high, so you can never predict what you’re actually going to get at retirement, even though we’ve got tools that we’ve come up with, when you can try and project what your share of fund will be at retirement and then how is that going to translate into a pension.

Obviously, that will be subject to the assumptions that we’ve made, so we assess what has come with now then you take out the impact, or the impact of those assumptions then what you tend to have now is more certainty, in terms of what you’re going to get. You’ve got more certainty in terms of the pension that you are going to get then that obviously, translates into more certainty in terms of the amount of salary that you are going to be able to replace when you retire.

If I say, as an example, we are going to retire with a pension of R50 per month, the R50 is a certainty in terms of the product we’ve got. Then when you retire you obviously know that you are going to get about 50% of your salary.

It enables better planning, compared to when we then say, “When you think you are going to retire with R50 but obviously subject towards the annuity rates that are going to be in the market.” Then it becomes more difficult to plan, whereas with this one it becomes much easier to plan for retirement. That’s the whole purpose of that product.

Read also: Matthew Lester’s retirement plan post Brexit: How long is long enough?

Let’s just get back to the timing of retirement and what one doesn’t is if you retire in June this year, rather than June next year, you could be seriously disadvantaged by volatility either way. How do you smooth this out? How do you make sure that the timing issue and do you communicate this? Do you say to people ‘look try and retire a year later or retire now rather than a year later’?

Yes, so if you’ve got a good thought investment strategy to start, then what will happen is you shouldn’t have the need to try and defer your retirement because at the start then, when you set out your retirement objectives you then set out basics – then you say that you don’t want to retire based on the assumptions that you are using.

I want to retire with like 80% of my salary. Then we set out a business strategy and a contribution rate at the start of your employment journey. Then if you follow that path we are saying that if you follow this strategy, at the end of the day when you retire, you should be on track. Then also what we tend to do then is with this life staging, you then change to switch automatic value.

It’s not a case of us coming up and saying, okay you’ve got five years to your retirement but we still think that the market is volatile, extend it by another year. It will be something that is set out right from the start to say that when you reach this stage then we switch you out of the market, into this portfolio.

Then when you get to this other stage, depending on what you’re going to do post retirement, then what? Then move into retirement, or shift your money through one of the products that we’ve got, so it shouldn’t be dependent on… If you are going to try and time retirement, then you are going to be at the whim of the volatility of the market. Rather than have set it out from the start, so you tend to look at retirement as a journey rather than as a destination, where you are going to be looking at the market what is happening.

How have you adapted to people living longer and the view that peoples’ money is going to run out. Whereas in the past, whatever they saved for was enough to keep them going for as long as they lived, so we have people living longer, there’s an argument certainly in Europe and Britain that people should be working for longer because they’re not going to sustain themselves when they do retire. In any case the retirement stage is arbitrary and the view is that people still have a lot to offer and can carry on. How are you adjusting to those kinds of factors?

I think it is a difficult situation, is that with the high unemployment levels that are currently in the country right now. It becomes difficult for people to continue being employed post retirement. I see a lot of employers then letting people go as they reach the contractual agreed retirement age.

In terms of how you counter that one of the things that you look at, in terms of if someone is going to buy a Living Annuity, then you tend to try and look at that draw down rate that they do post retirement to try and advise them to say that based on the statistics that we are seeing (that people are living longer) then you shouldn’t be withdrawing a high proportion of your lump sum early because if you do that then it’s going to run out obviously. How it is going to work is different from how it was looking 20 years earlier

People were living much shorter than current, so it’s almost like the longevity rate scale is increasing. If that is increasing, then people ought to be educated in terms of saying then the broader returns that you get on those annuities you need to adjust them and take that into account.

Then also the other issue that tends to come into play, when it’s a guaranteed annuity obviously there, the annuity is guaranteed and it is guaranteed for life. The only danger that you’ve got there now is that because insurers are pricing for the fact that people live longer as well, then the annuities there are becoming more and more expensive for people.

Right, let’s leave it there for today. That is Mathias Sithole, head of Public Sector and Corporate Consulting at Liberty Corporate – talking about the impact of market volatility when you are close to retirement and clearly, that volatility can be managed but you need to look at the detail and be careful.

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eu  |  retirement  |  markets  |  brexit


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