How are my retirement savings invested?

The trustees of each retirement fund must decide on the best way to invest your savings in the fund and there are some guidelines in law.

Often retirement fund members are given some choice in how their savings are invested. This will most likely be the case if you save in an umbrella retirement fund or in a retirement annuity.

But whether you have investment choice or not, the trustees must draw up what is known as an investment policy statement.

This policy statement should set out:

• What the investment objectives of the fund are;
• The risk profiles of the fund members, which indicates how much investment risk they can afford;
• The investment time horizons; and
• How the trustees will monitor the investments to ensure the goals are achieved.

If the trustees offer members a choice of pre-selected investments or investment strategies, they also have to offer a default investment strategy for members who are unwilling or unable to make a choice.

Retirement funds may give investment instructions or mandates directly to asset managers or life insurers who offer investment portfolios that include those that smooth returns.

Many of those that offer you investment choice will give you access to that choice through an investment administration system called an investment platform. An investment platform offers you a selection of underlying unit trust funds and possibly exchange traded funds and shares.

Regulation 28

In whichever way the fund structures the investments, they must conform with regulation 28 of the Pension Funds Act.

The aim of regulation 28 is to ensure your investments have some protection against investment risk by ensuring your savings in a retirement fund are well diversified across and within asset classes and are not too exposed to any single share, bond or other security.

The most important limits in regulation 28 are:

• Shares, including offshore shares, are limited to 75% of the fund.
• Listed property, including offshore listed property, cannot exceed 25% of the fund.
• Offshore assets (shares, bonds or cash) are limited to 45% of the fund.
• Investments in commodities are limited to 10%. Investments in gold can make up 10% of the fund, but exposure to other individual commodities is limited to 5%.
• Investments in alternative assets are limited to 15% of the fund with no more than 10% in hedge funds and 10% in private equity. Collective investment schemes in securities, however, cannot invest in these assets.

Changes to Regulation 28 have been proposed in order to encourage retirement fund investment in infrastructure.

The current regulation does not include “infrastructure” as a specific category, and funds currently invest in infrastructure through a number of asset classes including equity, bonds, loans and private equity.

It is not possible to record the extent to which retirement funds are invested in infrastructure, because it is not defined.

The proposed amendment also splits up the allocation to hedge funds, private equity and any other assets not listed in the regulation and provides specific limits for each of these asset classes.

Default investments

Regulation 37 of the Pension Funds Act requires all defined contribution pension funds and provident funds to have a default investment strategy.

A fund may have only one investment strategy which is the default strategy, or it can have a number of investment strategies and offer members the choice to opt out of the default strategy.

Funds can also have different default strategies for different members depending on their age, actual or expected future contributions, investment value in the fund or any other criteria the trustees deem appropriate.  

The regulation came into effect in March 2018 and all existing funds had until March 2019 to implement it.

In choosing a default investment portfolio, the trustees of a fund must:

• Choose one that is appropriate for members who are automatically placed in that investment portfolio;
• Choose one that is reasonably priced and competitive;
• Avoid any investment strategies with loyalty bonuses;
• Avoid any strategies that lock you in for a certain period; and
• Consider both active and passive investment options.

As a member you must be adequately informed of:

• The assets in the default strategy;
• The performance of the default investment portfolio relative to an appropriate benchmark over at least three years; and
• All the fees and charges.
  
  

Life staging

Many funds’ default investment options make use of a life-staging model. This means as you approach retirement your investments will automatically be moved from higher exposure to risky assets such as equities and listed property to lower exposure to these asset classes.

These life staging models use different time horizons to retirement to reduce your risk ranging from seven years before retirement to three years before retirement.

If your retirement date changes when you change employers or if you plan to continue working after your employer’s retirement date, you need to ask for advice to avoid the consequences that investing too conservatively too early can have on your investments.