Life-stage portfolios change to reduce volatility through lower equity allocations

IN SHORT: The life-stage portfolios will, through lower equity allocations, move to new, less volatile asset allocations over an eight-month period that started in December 2019. This will affect certain members more than others, depending on their retirement plans and investment strategy. Please read the rest of this newsflash to see how you may be impacted. We will continue to send you updates during the transitioning period.

The Fund would like to ensure that the various life-stage portfolios are optimally structured to achieve their long-term investment objectives, but with the least possible volatility (investment market ups and downs). This is because volatility has a significant impact on members’ investment outcomes, especially for members with living annuities who have to make decisions about the draw-down rate of their monthly annuity payments on the anniversary of their annuity.

The Trustees therefore asked the Fund’s investment advisors to do a careful review of the life-stage portfolios and to recommend adjustments to the portfolios to reduce volatility. As a result of this review, all portfolios will see adjustments to reduce investment volatility. See the next page for more details.

How this will affect you as member

If you are comfortable with and understand your journey through the life-stage cycle as you move towards retirement AND if you plan to select the guaranteed life annuity option at retirement, no further action is required from you. The revised default life-stage investment strategy still aims to achieve (for life annuitants) a Replacement Ratio of 60%-70% of a member’s pensionable salary at normal retirement age (60), following 35 years’ membership of the Fund and no withdrawal of a cash lump sum on retirement.

HOWEVER…

• If you are within 5 years of retirement and are considering buying a living annuity at retirement, the default life-stage portfolio in which you are currently invested may not provide you with an optimal solution. You should consult a financial adviser to discuss whether it would be prudent to opt out of the life-stage default model in favour of a switch to a less conservative portfolio.

  OR

• If you have chosen a specific life-stage portfolio to achieve specific market exposure, the adjusted life-stage portfolio may no longer provide the equity market exposure that you expect. You should consult a financial adviser to discuss the changes (and the staged implementation approach) to ensure that you gain the exposure you require.

More about the review process

During the July 2019 Investment Strategy Review Days, a full review of the Fund’s life-stage portfolios was undertaken. The Fund’s investment advisors, Alexander Forbes Financial Services, undertook detailed modelling exercises based on the long-term asset class return assumptions and the asset allocations of the various life-stage portfolios. The aim of the modelling was to ensure that each life-stage portfolio is optimally structured to achieve its long-term investment objectives, but with the least volatility possible.

The results of the modelling saw marked changes in the strategic asset allocations of all the life-stage portfolios, and particularly so for the lower equity life-stage portfolios.

More about the specific changes

As a result of the review, all portfolios, with the exception of the life-stage high equity portfolio, will see a move from risk assets (local and offshore equity) to less volatile local fixed-income investments, such as flexible bonds and cash. With regard to the life-stage high equity portfolio, the risk-return trade-off to achieve the inflation target (CPI + 5%) resulted in a slight increase in offshore assets, compared to local assets.

The table below shows in more detail how the strategic asset allocations of the various life-stage portfolios will be adjusted over the next eight months.

If you have questions

As indicated above, the Fund will continue to send updates through further newsflashes during the eight-month transitioning process. In the interim, if you have any questions or concerns regarding these changes, please call David Datnow on 053 807 3363 or Hemah Moodaley on 053 807 3504, or email pension.post@dbpf.co.za.