Institutions are subjected to intense scrutiny with regards to how they invest money responsibly. While this is very much the case for the entire financial spectrum, it is especially pertinent in the case of pension funds, given that they harbour the precious savings on which individuals depend.

Retirement funds today are expected to exercise a responsible culture when it comes to risk taking, and to educate their clients about the risks they’re exposing themselves to.

“Our fund only accepts as much risk as is necessary to optimise payoff to members and pensioners per the stated portfolio targets and risk tolerance levels,” says Eric Visser, CEO of Sentinel Retirement Fund (see Fig. 1), who believes a responsible, liability-driven investment approach to be best practice.

“[The] approach followed by the fund, which incorporates an asset liability modelling process, is designed to specifically assess investment and liability related risks in setting asset allocation limits,” says Visser.

It is with this level of client service and flexibility that the fund has become one of the largest self-administered, defined-contribution, umbrella pension funds in South Africa and promises good things for the foreseeable future.

“Our mission is to position and grow Sentinel to provide sustainable retirement solutions to all market sectors,” he adds.

The fund, which as of June 30 last year actively managed ZAR 48bn, maintains a strict asset allocation and rebalancing policy designed to ensure risks are controlled and mitigated.

“Investment risks are evaluated at fund and mandate level against predetermined limits using traditional risk measurements,” says Visser. “In addition, individual investment managers are required to monitor risk at mandate level. Three sources of investment risks are measured: asset allocation, investment mandate and manager selection.”

“Sentinel does not have a sponsor employer/organisation and the pensioner portfolio must therefore be self-sustaining,” says Visser. “This portfolio is evaluated monthly based on the calculation of estimated funding levels by management in consultation with the fund investment consultant and actuary. Through the investment consultant and consulting actuary, a monthly review of the discount rate applicable to value pensioner liabilities is performed.

“Factors included in the calculation of the discount rate are dividend yield forecasts, yield to maturity (using the entire term structure of interest rates), fund cash flows and changes in the discount rate, which will lead to a revision of annuity values applicable to new entrants. The consulting actuary also performs a formal interim valuation annually and a statutory valuation every three years. Mortality assumptions are monitored and reviewed with each valuation and proactively adjusted based on actual experience and general trends in the industry.”

Past and present
According to Sentinel’s 2013 annual report, the fund received ZAR 1.99bn worth of annual contributions from 31,108 members and distributed ZAR 2.11bn of pension payments to 22,222 pensioners. Sentinel has taken significant steps to boost its national credibility of late, and established a reputation as a responsible investor.

“Sentinel has a proud heritage of securing the retirement fund benefits of employees dating back to 1946,” says Visser. “As stated, Sentinel follows a liability-driven investment approach. Asset liability modelling is performed in cycles of 18 months (maximum). This process incorporates the funds’ view of all asset class risk/return expectations and ensures that the fund, in pursuit of meeting performance objectives, only employs as much risk as is necessary to optimise payoff to members and pensioners. The resulting asset allocation provides the guideline to assessing any investment strategy.

“Management and the investment consultant continuously scan the investment horizon for new investment ideas, through informal meetings with managers and global networking. Should an idea pass this initial phase, a formal due diligence [process] by both management and the investment consultant will follow. If successful, a submission will be made to the investment committee for consideration.”

The fund’s investment committee, in conjunction with the investment consultant, will then assess the anticipated outcome of a particular investment strategy on a number of factors, including the overall risk/return profile; portfolio diversification; how it could assist in mitigating vulnerability to specific key risks; and to what extent it could change the fund’s exposure to specific key risks. Once both parties feel the risks have been properly accounted for and client expectations have been taken into consideration, the fund will then embark upon its chosen investment strategy.

“The fund has a diversified investment structure and all major asset classes are covered, including equity, property and fixed income,” says Visser. “Alternative investment strategies include private equity, unlisted real estate, hedge fund, credit and tactical asset allocation. The fund is furthermore geographically diversified across the globe with exposure to… developed markets, emerging markets (ex-Africa) and Africa.”

Sentinel is also subject to regulation that limits its foreign exposure to 25 percent, plus an additional five percent to the rest of Africa, thus a total of 30 percent at any given time. Regulatory limits have also set exposure caps on various asset classes, individual investments and alternative investment strategies.

Perhaps the most significant development of 2013, however, was the fund’s decision to merge with the Mine Employees Pension Fund on July 1.

“Members and pensioners benefit from a single larger entity through greater economies of scale, which provides for cost efficiencies and reduced duplication over the longer term. Investment growth will also be maximised while member growth opportunities can be focussed on,” says Visser.

“Strategically, Sentinel will also be better positioned in terms of [the] government’s retirement reform initiatives, where a clear preference has been shown for large industry funds as these funds provide cost-effective retirement savings solutions.”

The South African market
Pension provision in South Africa has undergone quite considerable changes of late in an attempt to boost access and provision for those partaking in a scheme.

“In the formal sector for employees who hold permanent employment contracts, retirement saving is largely regulated through employment contracts and therefore compulsory,” says Visser.

“However, preservation of retirement savings throughout an individual’s career is not compulsory and many individuals access their retirement savings when changing employment to reduce/settle debt or simply to spend. This results in the majority of South Africans reaching retirement with insufficient capital provision.

With very high levels of unemployment and a huge informal sector that provides little retirement saving opportunities, South Africa still has much to do to ensure individuals
reach retirement

“The informal sector, which plays a huge role in the South African economy, provides very little, if any, access to retirement provision. A government Old Age Pension is in place but pays a nominal monthly pension to those who qualify in terms of a means test.”

Over the past 24 months, however, the government, through the National Treasury, has announced a number of proposed reforms to both the retirement and savings industries. These reforms are expected to be implemented over the next 24 months and include compulsory preservation of retirement savings (only on monies invested after implementation).

Sentinel has for a number of years focused on member education through the provision of an advisory service that seeks to assist members with retirement planning and inform them of the dangers when accessing retirement savings prematurely. This strategy has encouraged a great deal of the fund’s members to preserve their retirement capital when exiting the fund.

In recent years, access to retirement savings opportunities may very well have increased, given that new products have entered the market, combined with the loosening of regulations governing certain retirement savings vehicles such as retirement annuities.

“The challenge, however, is ensuring the preservation of retirement capital throughout an individual’s working career,” says Visser. “The National Treasury’s forced preservation proposal will go a long away [towards] providing a solution, but this proposal only impacts new savings after implementation date and may therefore take many years to be fully effective.

“With very high levels of unemployment and a huge informal sector that provides little retirement saving opportunities, South Africa still has much to do to ensure individuals reach retirement and can financially support themselves.”

Given that responsible funds such as Sentinel educate beneficiaries about the many risks involved, the market for pensions in South Africa looks set to improve.