Trustees spend too much time trying to pick “the right” asset manager, whereas they should be focusing on controlling the other factors that play a much greater role in determining whether or not retirement fund members will retire financially secure.
This was the view of a panel of asset managers during a discussion at the Winter Conference of the Batseta Council of Retirement Funds for South Africa, which was held in Kempton Park on June 1 and 2.
The panel consisted of Khaya Gobodo, the co-strategy leader: frontier and emerging markets at Investec Asset Management; David Gluckman, the head of special projects at Sanlam Investments; and Andrew Davison, the head of investment consulting at Old Mutual Corporate.
A retirement fund would have earned more or less the same returns over the past 10 years if its trustees had invested the fund’s assets in a balanced fund run by any one of the well-known asset managers, Gluckman said. Therefore, he said, the trustees would have served the members’ interests better if they had spent more time debating whether the contribution levels were appropriate and whether the fund was making the right trade-off in how it allocated contributions between risk benefits and retirement savings.
Davison said trustees put the cart before the horse and want to find an asset manager before thinking through all the factors that will determine whether or not members will be able to retire comfortably. When making decisions about the variables that affect this desired outcome, such as contribution levels, the age at which members can retire and the required return on investments, trustees should ask themselves whether what they decide will translate into a good or bad outcome for members. It is only once trustees have ascertained all the objectives that must be met in order for members to retire securely that they should look for an asset manager, Davison said.
Gobodo said there was insufficient evidence that asset management costs are the big destroyers of value for fund members. Although there is room for investment costs to be reduced, he said costs are only a “small part” of the reason that most fund members do not retire financially secure. Gobodo said that 80 to 90 percent of the problems with retirement-funding would be solved if “painful” interventions were made in the more important areas of preserving retirement savings, setting the right contribution levels, starting to save early and preventing the “churn” in investment strategies. These problems should be resolved before the focus shifts to asset management and investment costs, he said.
Davison said the key risk facing members who save in defined-contribution retirement funds is not saving enough. He said the best way to measure whether members were on track to achieving the required level of saving was the replacement ratio, which shows a member’s pension as a proportion of his or her final salary at retirement. Although the replacement ratio was not perfect, it should be the benchmark used by most funds.
Trustees should use replacement ratios to communicate to members whether they are on track to achieving financial security in retirement and to help them to work towards it, Gluckman said.
Davison said trustees should explain to members how their decisions – for example, choosing a certain contribution level or withdrawing their savings – would affect their replacement ratios. Members should be told throughout the savings stage, not when they are about to retire, whether they were moving towards or away from meeting the required replacement ratio.