Risk Management

In the previous article, the benefits of smoothed bonus portfolios for living annuitants were explored, highlighting their ability to mitigate downside risk during market downturns, as indicated by their improved “Time to Ruin” in the worst 10% of scenarios modelled. This article explores a “best of both worlds” strategy by blending a smoothed bonus and market-linked portfolio within a living annuity construct to balance long-term growth with capital protection. Overview This study compares three portfolios: a market-linked portfolio, a partially vesting smoothed bonus portfolio, and a “blended” portfolio consisting of equal allocations to the market-linked and partially vesting smoothed bonus portfolios. Within the blended portfolio, the allocation to the smoothed bonus portfolio will be used to service the monthly income requirement. All portfolios have identical underlying asset allocations of 60% equities, 20% bonds, 10% property, and 10% cash. The investigation used 1 000 randomised scenarios (including returns for each asset class and inflation) to assess the portfolios’ performance over a 30-year retirement period. The statistic used for comparison is Time to Ruin (TTR), which measures how long an annuitant’s capital can sustain inflation-adjusted monthly drawdowns. Drawdown rates start at 6% or 8% per annum and are adjusted annually on the policy anniversary date. ...

Smooth bonus portfolios are a key investment tool for pension fund members in South Africa. Insurers design them to balance growth potential with downside protection. These portfolios smooths returns over time, reducing the impact of market volatility while offering different levels of capital protection. While the focus is usually on their benefits in a pre-retirement scenario, this article evaluates their benefits in a post-retirement (living annuity) scenario. Overview A partially vesting smooth bonus portfolio (incorporating simplified management rules and capital charges) is compared to a growth-oriented market-linked portfolio, where both portfolios have the same underlying asset allocation of 60% equities, 20% bonds, 10% property, and 10% cash. The simulation study used 1 000 randomised scenarios (including returns and inflation) to assess the portfolios’ performance over a 30-year retirement period. The primary performance metric was Time to Ruin (TTR), which measures how long an annuitant’s capital can sustain inflation-adjusted monthly drawdowns. Drawdown rates start at 4%, 6%, or 8% per annum and are adjusted annually. ...

Introduction The two-pot retirement system addresses the financial challenges faced by many South Africans, but also aims to improve the preservation of retirement savings. It breaks from the traditional model where retirement savings are only fully accessible when members change jobs or when they retire. Instead, they will have access to a portion of their retirement savings without having to resign from their jobs and preserve the rest until retirement. This two-pot retirement system will come into effect on 1 September 2024. ...

The prevailing local and global investment markets are characterised by increased volatility and uncertainty largely arising from sluggish economies, the remnants of the 2022 bear market, and in South Africa persistent loadshedding, logistical and infrastructural issues and being grey listed. This can be a difficult time for retirement fund members, especially those who are very close to retirement, as any financial losses in their retirement savings during this time can have a serious impact on their financial future and their retirement planning. It is therefore crucial that these members carefully consider investment options that not only target inflation beating investment returns, but that also provide some capital protection of their retirement savings against investment market volatility and downturns. ...