There are many factors that are simply outside your control. Despite the best intentions to save for retirement and invest in a retirement fund, global markets go up and down, the cost of living increases and social factors result in material impact of your retirement income.

Smoothed bonus funds are designed to react to fluctuations by growing your money when markets are flourishing and managing the impact of lower returns when things aren’t going as well as expected. It can be disheartening that the timing of when you draw from your retirement savings could have a great impact on what you ultimately yield after years of saving.

Ndlovu and Van Der Vyver talk about how to mitigate risk and what advantages smoothed bonus funds bring to help you reach your retirement goals.

Want to read the conversation instead? See the transcript of this podcast below.

Malusi Ndlovu 00:04

Welcome to Big Business Insights, the Old Mutual Corporate podcast where we discuss human capital and benefit issues that concern all businesses, from up-and-coming companies to established corporate enterprises. Each episode focuses on one topic to bring you insights and help you make informed decisions for your business, your employees, and yourself.

Malusi Ndlovu 00:25
I'm your host, Malusi Ndlovu. And today we're talking retirement fund investing. And we're focusing on group retirement funds. That is the pension or provident fund usually provided by the employer. Now, even though employees haven't selected or joined that retirement fund in their personal capacity, but through their employer, there are still things they can do to get the most from that fund. And the employer and decision makers of the fund also have things that they can do to make that fund work much harder for their people. Someone who knows how group retirement funds work is Old Mutual's Fred van der Vyver. Fred manages Old Mutual's Smoothed Bonus portfolios, the leading smoothed bonus fund in South Africa. He's also the Head of Superfund Umbrella, the largest open multi-employer retirement fund in South Africa. So, he knows a thing or two about retirement funding. Hi Fred.

Fred van der Vyver 01:28
Hello Malusi, it's wonderful to be here, thank you.

Malusi Ndlovu 01:30
Great to have you. Now, Fred, most established organisations have got some kind of retirement fund that they've set up for their staff. They usually have a committee that manages the retirement fund, the selection of their staff that form that committee, and they may even have a consultant who's knowledgeable and guides that committee. Beyond that, why should HR or the human capital fraternity get involved in what happens in the fund?

Fred van der Vyver 01:59
I like the question around why. You know, we can so easily be caught up in a lot of technical discussions but keeping it simple and asking the right why questions is really the start of the conversation. And so, if you asked me why should an HR function concern themselves with this? To me, the answer is very simple. It is recognising that if you employ somebody to give you their time and skills and effort as part of an employment contract, you also want to provide them with the security and the peace of mind that their future financial needs are taken care of, when they will no longer earn an active income from you. So, it's one thing to make sure that your employees will be comfortable, that they can pay their bills at the end of the month. But deep down, we all recognise that there will come a day when we no longer earn this active income. And then being able to provide your employees with a value proposition, that I'm not just giving you a salary for this month, I'm actually providing you with the benefit package that will take care of your current and future financial needs.

Malusi Ndlovu 03:10
Wow, that's really profound. So, we talk about peace of mind, we talk about wellness, and we talk about outcomes for the member. But if you look at the investment markets, there's a lot that's happening. They're very volatile. There's the war in Ukraine, there is uncertainty about what the Rand is doing, there is unemployment in South Africa. Surely, getting your employees to be invested in these markets is not the best way to provide them with peace of mind. How do we square that circle of meeting those two objectives?

Fred van der Vyver 03:40
That's a great question. And the frank answer is yes, it can be a double-edged sword. So, while on the one side, you want to provide your employees with peace of mind and a sense of security that their financial needs are taken care of, if the way you go about it, is to put in front of them a lot of uncertainty and a lot of risks that they are now needing to deal with, you can almost in a way negate the original intention. But the answer is not to avoid those risks. The answer is not to, you know, turn a blind eye to this real need that we all know we have to provide for future financial needs. And the only way to provide for those future financial needs is to invest, to save, and to invest over the long term. We all also recognise that there's a natural tension, especially in the current environment in South Africa, between how much of your salary you need just to survive this month, versus how much you can afford to put away. So, accepting that there's a limited amount that you can contribute to future needs. The math just tells us that you need to earn the maximum possible investment returns from those limited contributions. So, you've got to sweat those assets, you simply cannot take a portion of your salary, invest for the long term, and say, "I'm going to avoid the risks you spoke about, I'm just going to invest it in a bank account". Because then we know, the math tells us that you're not going to have enough to provide for your future needs. So, the answer's clearly then not to avoid the risks of global macro-economic, you know, uncertainties. But how do we optimally manage that risk, accepting that we have to take it? And that really talks to the heart of what we're trying to do at Old Mutual.

Malusi Ndlovu 05:39
So, Fred, risk sharing is such a natural thing for most South Africans. They belong to stokvels, you know, people help each other in the community, and so on. I really like the idea. But I imagine that for risk sharing to work best, you need as many people as possible. Tell us a bit about that.

Fred van der Vyver 06:00
Quite correctly, as you say, in South Africa, naturally, our culture and our mindset extend to risk sharing. We share risk by being members of a medical aid fund, in the sense that the risk of a very large medical expense is shared with all the other members, and that cost is absorbed through premiums that people pay. Car insurance is another good example. If you want to extend that concept into retirement savings, it is critically important that we have enough members to share that risk amongst. In the same way as you can't run a good medical scheme with three members. If one person has to go in for a very expensive op, the impact of that cost on the premiums of the other two members will just be way too much for them to absorb. So, if you think about it, if we want to share the risk of markets being down when you need to draw your money, i.e. you share the risk of markets being down when you reach your retirement age, or markets being down when you are retrenched and need to live off of your retirement savings for a short period of time, you have to have a large number of members across the age spectrum. So, you can't have all your members retiring in the same year. And ideally, you want to have members sharing the risk with those members coming from different industries and different companies. So that if one company needs to go through a very unfortunate large retrenchment exercise, that risk is not just shared amongst the employees of that company but can be shared amongst many other members in different industries and companies. And that is exactly what we do in our Smoothed Bonus investment portfolios that we offer on the SuperFund as a default investment strategy. In the Smoothed Bonus fund that is used as the default, we share the investment risk through smoothing it. And to be precise, it's the risk of markets being below the long-term trend when you need to draw your money. And we share that risk amongst 400,000 odd members that are potentially, you know, at various different stages in their employment journey, ranging from early 20s all the way through to 60s being close to retirement. We also share that risk amongst employees that work for different companies in different industries. So, if an unfortunate event like an airliner going into liquidation and all the members of that airline company being retrenched, and markets happen to be down at that point in time, you can have, you know, that being supported by members that are in different industries and not being affected by that same risk event, so to speak. So, the short answer is, yes, you need size, you need size and diversity. And it's very difficult to get there. But once you are there, you have a good thing going, ja.

Malusi Ndlovu 09:15
Sounds very efficient. But let's talk practically. March 2020 was one of the worst periods of time in the JSE. It lost, I think, at least 20% over a very short period of time. How would the Smoothed Bonus funds have handled that event?

Fred van der Vyver 09:36
I almost want to - if you don't mind, change the question to say, how would that event have affected people, members, that were invested and retiring at that time.

Malusi Ndlovu 09:47
Even better.

Fred van der Vyver 09:47
So, we can so easily get caught up in technical and theoretical discussions and I myself run that risk. And then we get into arguments like yes, but markets always recover, so just hang in there or, you know, it's part and parcel of the investment journey, etc., etc. But sometimes we need to look at two people and compare their scenarios. So, let's take two individuals. They both studied the same course, they went into the same career... if you like, two engineers, and they were classmates. They were born in the early 1960s. And let's say they entered the job market in 1980. And for 40 years, they contributed, and they contributed exactly the same amount of their salary, they followed exactly the same investment strategy, they incurred exactly the same investment costs, everything is exactly the same. The only difference is, the one person straight out of varsity in 1981, joined the job market in January 1981. Whereas the other one took two months longer to find the ideal job. And therefore, started in March or April. Now, let's fast forward 40 years. They both retire. The one retired, say end of January, end of February 2020, whereas the other one retired end of March or April 2020. And what we saw in the Covid scenario in March 2020, was that most balanced funds, even well diversified balanced funds, could have lost over 20% of their value within the space of three weeks in March. And so, what we are seeing, or at least what we saw, was that members that retire as close as one month apart, could have had outcomes that are as much as 20% different.

Malusi Ndlovu 09:48
Wow.

Fred van der Vyver 10:24
And again, when we talk numbers, it can sometimes be abstract, let's take it as a fifth of your lifetime retirement savings can be wiped out due to factors completely outside your control within the space of three weeks. That's the reality of what happened. And so, in a normal Balanced fund, within the space of three weeks, you could have lost 20% value, and then lock in that loss for the rest of your life if you bought a life annuity. And so, Smoothed Bonus funds during that period, most of them were flat, so no negative returns and negative impact. And some of them were down by as much as 5%. Now, as bad as 5% sounds, it's a lot better than 20%.

Malusi Ndlovu 12:36
Ja.

Fred van der Vyver 12:36
So, really what we saw was this principle, this philosophy of sharing investment risk, resulting in more consistent outcomes for members that retire very close to one another, in or amidst a global event completely outside their control.

Malusi Ndlovu 12:57
Fred, I really like your example, in real life of the two members who retired a few months apart from each other in 2020. And having identical employment history, contribution history before that, because it really brings home this question of outcomes. And I can see a situation where the second member who retired after April and lost 20% of their value, going back to HR and saying, listen, how come I got 20% less, even though I've worked exactly the same time as my ex-colleague over here? And that's really the risk that we're trying to manage, ultimately, beyond the technicalities of the investment risk.

Fred van der Vyver 13:43
Absolutely. And, if you think about it, we all also know that, legally speaking, if that person comes back and complains about having lost 20% of his lifetime savings, legally speaking, the member doesn't have a foot to stand on, because he accepted that level of risk in the retirement construct that we have in South Africa. But that's not the point. The point is, it's still not the ideal outcome. And if we set up this, you know, structure and fund and all the work that goes in around achieving outcomes, in a way to give consistent outcomes, so that people have peace of mind, then we got to say to ourselves, it's about more than just meeting the legal requirements.

Fred van der Vyver 14:34
It is about designing and managing risks, so that you have consistent outcomes. And it's also not just about the experience at retirement. The example talks about, you know, two people retiring close to one another in the early half of 2020. What we want is for people throughout their working career to have peace of mind that their future retirement needs are taken care of. So, you want them to engage with their retirement savings. And you want to show them that there is a steady, consistent progression towards securing future retirement income needs. And therefore, it is so, so important that while you take the risk that is necessary to be taken, you also manage that risk in an optimal way, so that you achieve the original outcomes you wanted: peace of mind and security of income provision.

Malusi Ndlovu 14:34
Absolutely.

Malusi Ndlovu 15:34
And that's what these Smoothed Bonus funds are there for. They're able to help manage both these two objectives at the same time.

Fred van der Vyver 15:42
Absolutely. It is about managing the risk, so that you can take the necessary amount of risk. So many times, people think about Smoothed Bonus portfolios as conservator funds, and in that way almost anchor it around avoiding risk. And the modern Smoothed Bonus portfolios are the opposite. They are recognising that we've got a very efficient way of managing the risk by sharing the risk amongst members, and therefore that equips us, it empowers us to almost take more risk than what a typical Balanced fund would usually do. So that we can achieve the long-term return we need, while at the same time optimally managing the risk and protecting the members from the typical anxiety that comes from the uncertainties in the macroeconomic environment.

Malusi Ndlovu 16:36
This is very insightful. Thank you very much, Fred. And it was really good to have you. I've been talking to Fred van der Vyver, who manages Old Mutual's Smoothed Bonus portfolios as well as Old Mutual's SuperFund Umbrella, which is the largest open multi-employer umbrella fund in the country. Thank you, Fred.

Fred van der Vyver 16:53
Thank you, Malusi. It was lovely to be with you.

Malusi Ndlovu 16:59

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