How to protect your retirement fund from market volatility

When 60-year-old Thuli* retired in January 2020, having worked more than three decades as a teacher, she had an estimated R5m in pension savings to secure her retirement income from her market-linked pension fund. 

Unfortunately, a number of her fellow retirees were not so fortunate. Had Thuli retired two months later, she could have seen R1m wiped off those savings due to the sudden global market crash driven by Covid-19. 

The pandemic and its associated lockdowns triggered a crisis that sent markets into freefall. 

From an investment point of view, SA employees who retired during the level 5 lockdown in March 2020 would have lost 11% of the value of their investments -  according to Alexforbes’s Global Large Manager Watch. Some lost even more. 

However, the Old Mutual SuperFund was able to protect its members’ savings by reducing the impact of the market crash.  It was able to do so with its default smoothed bonus investment portfolio and the sheer size of its member base. 

The SuperFund’s default portfolio proves to be invaluable because of the market volatility in the modern investment landscape.

Dips, spikes, and crashes can be sparked by anything from political and economic factors to industry-wide sentiment and individual company performance. Who could have predicted Covid-19 or the war in Ukraine?

Perennial volatility

When investors are prepared for the turbulent times in their investment journey, they are less likely to be surprised when they happen and more likely to react rationally. 

But as Thuli’s example illustrates, volatility can have catastrophic consequences if the market swings against you at the point of your retirement - or at any point at which the member requires a benefit to be paid. 

Employers and employees are best placed when they understand the options they have and which investment products are designed to mitigate market volatility’s potentially devastating effect on member benefits. 

SA’s changing retirement fund landscape

Old Mutual's SuperFund default Absolute Growth Portfolios (AGPs) weather the storm by “smoothing” (risk sharing) their investment returns and guaranteeing outcomes for investors.

This reduces the impact of market volatility significantly. 

The concept of smoothing to manage investment risk is not new. Originally, it was premised on a defined income being provided to employees when they retire. This resulted in a secure retirement system that protected members from market fluctuations through a system known as defined benefit funds. 

Back then, most big companies had a large defined benefit pension fund, with members deriving a defined income benefit based on a fixed formula when they retired.

Those members were protected from market volatility even though the fund invested in volatile assets such as equities. The downside was that employers carried a lot of the risk and had to pay fund benefits even when the company was not profitable. 

The only thing that is defined in this system is how much the fund member (or employee) saves. It is more akin to a normal savings fund, with the risk shifted firmly onto the individual member. 

The best of both worlds

Old Mutual SuperFund aims for sufficient returns in excess of inflation over the long term, while reducing the volatility associated with market-linked investments required to deliver these returns.

By declaring a return that is focused on the long-term return expectations of the portfolio (and by providing capital guarantees at the same time), smoothed bonus funds ensure investors are certain of the value they’ll receive when they retire or exit the fund.

The smoothed bonus includes two investment mandates (aggressive or conservative), with commensurate focus on growth assets such as: property, alternatives, and local and global equity.

Investors have a choice of four guarantee levels on all capital and declared bonuses, depending on the risk level they are most comfortable with. 

Smoothing and scale 

The SuperFund has more than 400,000 members who are invested in smoothed bonus funds. They subscribe to the philosophy of sharing market volatility risk with each other by all being invested in a fund that offers smoothed returns.

While AGP is SuperFund’s default portfolio, members have the option of investing in other portfolios, where they accept the additional market risk.

Old Mutual holds an estimated 75% of SA’s smoothed bonus market share. 

After years of maturity, its funds have reached the state of “optimal smoothing”, where the critical mass is substantive - with diversified companies and members across the age spectrum - and has derived success since being released into the retail market. 

Retirees such as Thuli can rest easy, knowing their financial wellbeing is secure when they retire – no matter what the markets do.

• About the author: Malusi Ndlovu is the director: Large Enterprise Market at Old Mutual Corporate.

This article was paid for by Old Mutual. 

^{* To protect the client’s confidentiality, a pseudonym has been used.}