The move to defined contribution (DC) pension funds shifted the risk from investment firmly in the direction of the employee. The paternalistic defined benefit (DB) regime promised to give employees a pension based on final salary and length of service. It was a tool to entrench employee loyalty. However, in years of high inflation and poor market performance it was a promise that was hard for employers to keep without incurring large actuarial liabilities.
So almost all private sector funds moved from DB to DC in the 1990s. It took the employer off the hook for its employees’ retirement obligations.
One form of paternalism continued, however, and that was lack of investment choice. Many people were forced to invest in extremely expensive smoothed bonus funds, while more enlightened employers might have given staff a mix of a 50% smooth bonus and 50% market-linked investment.
My view in my younger days was that as DC members take all the risk, they should have the right to invest as they choose. Perhaps just not to go to the casino, and cryptocurrencies hadn’t been invented yet, but within the boundaries of regulation 28 of the Pension Fund Act, which limits equity exposure to 75% of assets and offshore to 30%.
Initially, DC funds used the asset managers attached to their administrator. For example, Old Mutual’s employee benefits clients were overwhelmingly served by Old Mutual asset managers. I was keen to give people freedom to choose their own managers, preferably the more energetic, less sleepy newcomers of the day such as Coronation and Investec (now Ninety One). But not all of those "hot" managers have done well — and think of failures such as BoE, or some of the first-generation black-controlled managers such as Infinity and Prodigy.
Yet Foord, which was deeply unfashionable in the late 1990s, is a serious choice today.
With hindsight, I think the only time it makes sense to select your own manager is when choosing an index tracker
So perhaps the solution is that it is essential to split money between different managers and not back the fashionable player. For example, a few years ago Allan Gray was all the rage, and while it still has a part to play, anyone who is invested solely in Allan Gray would have been quite rightly anxious over the recent past.
Perhaps the closest fund to a universal default is the R180bn Alexander Forbes Performer Fund, which splits funds between about five managers and uses its strategic partner, Mercer, to run its offshore portfolio.
The right track
With hindsight, I think the only time it makes sense to select your own manager is when choosing an index tracker, in which case the trustees can pre-select the cheapest for their members. Still, I’d argue that members should have a choice between an active and an index-based approach and between a low-equity and a high-equity fund.
It also puzzles me that there is just R6.7bn out of R1.15-trillion in multi-asset funds in what are called target-dated unit trusts. These change asset allocation based on how far away you are from retirement. There will be funds with a target date of 2030 or 2040, for example.
It saves the expenses of hiring a financial adviser to review your portfolio, and these funds can play a crucial role in your stage of life.
But there is one rule I’d like followed: that employees not be allowed to choose a low-equity fund until they are no more than five years from retirement.
Any sooner, and it comes at a substantial opportunity cost.
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