The stats show that just 6% of South Africans will retire in comfort, meaning that their savings will allow them to survive on 70% or more of their pre-retirement earnings.
The Organisation for Economic Cooperation and Development (OECD) recently published a report on global pension trends, and if there’s any comfort in this, it is that we are in fairly good company (though much worse off than developed countries). The retirement shortfall problem is a worldwide phenomenon and getting worse.
Among the reforms being adopted to help close this gap are increasing the retirement age, enhancing work incentives and improved tax rules for savers and pensioners.
Adriaan Pask, chief investment officer at PSG Wealth, says the so-called retirement shortfall – the savings you need to join the 6% who will retire comfortably rather than in poverty – is growing by the day and is particularly acute among millennials.
“A few years ago, people were advised to save 15% of their monthly earnings, but that is no longer sufficient for most people today. In the US, millennials were advised to save close to 40% of their income for retirement to close the retirement shortfall, but that’s not viable for most people.”
The World Economic Forum put the retirement shortfall gap in 2015 at $70 trillion, which was more or less in line with the global GDP. This shortfall increased to around $80 trillion by the end of 2018 and is projected to grow to $400 trillion by 2050 (or about five times the size of the global economy today).
There are broadly three solutions to the problem:
- Increase your rate of monthly savings as part of a habit of savings, and refuse to break this habit no matter what emergencies may arise;
- Continue working well past retirement age;
- Consider a slightly more aggressive investment vehicle to help you reach your savings targets.
It was for this reason that the PSG Wealth Regulation 28 Equity Portfolio was created in 2012. The following graph shows its performance relative to the Asisa (Association for Savings and Investment SA) Multi-Asset High Equity sector average.
The underlying assets of the portfolio include a diversified asset allocation with exposure to domestic equities (50.8%), offshore equities (32.1%) and domestic property equity (10.4%).
“Achieving the long-term objective of the fund remains our primary focus, but we do consider tactical shifts in light of macro considerations where appropriate,” says Pask.
“This approach has paid off handsomely for our clients,” he adds. The portfolio has outperformed its benchmark (the Asisa average mentioned above).
Many have a set pension plan or retirement annuity through their employer, but even that may not be sufficient, says Pask. “We face macro- and socio-economic headwinds that weigh on retirement investments, such as inflation, a slowing economy, increasing longevity, and industry and regulatory headwinds.”
Regulation 28 of the Pension Funds Act sets out the maximum allocations for different asset classes. Funds are not allowed to invest more than 75% in equities, 25% in property, or 30% in offshore equities (40% if Africa is included). When it comes to cash or SA government-guaranteed bonds, there is no limit. Hedge and private equity funds are limited to 10%.
“While the regulation is intended to help protect investors from too-risky investments, there are concerns that for some investors it may limit the level of growth they are able to achieve from their assets, which could, in turn, impact their ability to achieve their goals,” says Pask.
This fund is aimed at people with an investment horizon of 10 years or longer, who don’t want to be constrained by the general balanced nature of Regulation 28, are focused on growth, and are comfortable with fluctuations in the markets.
The portfolio’s primary objective is to deliver long-term equity-like returns while adhering to the requirements of Regulation 28. It aims to outperform the SA Multi-Asset High Equity sector average (a proxy for aggressive, long-term unit trusts investing within the guidelines of Regulation 28). It aims to achieve this by maintaining a bias for growth assets (equity, property and offshore assets) within the limits imposed.
“There are many factors that need to be considered in planning for a comfortable retirement. You also want to ensure your assets grow as much as possible so that you are well-positioned to reach your investment goals. Smart investing before retirement can help to ensure that you are able to do so. Consulting a financial advisor, and using managed portfolios designed for use in retirement products are two examples of tools we make available to you to help you eliminate some of the uncertainty.”
Brought to you by PSG Wealth. Administered by PSG Multi-Management, FSP 44306. For more information, visit www.psg.co.za