NEWSLETTER University of Stellenbosch Retirement Fund April 2008 Volume 13 1. 2. 3. 4. 5. Economic Commentary: 2007 What to do in these volatile markets? Investments of USAF Lifestage Model & CPO Disability Cover 6. Third Dimension Policies 7. Preservation of Retirement Benefits & Preservation Funds 8. Alexander Forbes Online 9. Nomination Forms & Benefit Statements 10. Trustees of the Fund 1. Economic Commentary: 2007 The levels of interest rates at home and abroad dominated the economic landscape over the last quarter of 2007. The second half of 2007 was challenging for both the local and global economies. Locally there are concerns regarding the significantly rising levels of inflation, with some economists predicting that CPI(x) may be at 8.5% in the first quarter of 2008 and remain outside the targeted 6% ceiling for the balance of the year. The main reasons for the high inflation are higher food prices, commodity prices (oil hit $100 to the barrel) and capacity constraints within the local economy (most notably electricity delivery). Interest rates were raised by 0.5% in December, and the high inflation situation put pressure on for another increase early in this year. However, the interest rate remained unchanged in January 2008. The number of successive interest rate increases is taking their toll on consumers. Many retailers reported lower sales in December than in the previous five years. There are signs of the economy slowing down rapidly which may need interest rate cuts to revive it. Politically there may be pressure to do so. Internationally there are still concerns regarding liquidity following the sub prime lending crisis and subsequent liquidity crunch which is forcing global banks to reduce their interest rates. In the United States there are concerns that the economy is slowing down significantly and may be in recession. The critical issue for 2008 will be whether growth in emerging markets will counteract the slowing down in the developed countries. South African resource shares significantly outperformed their financial counterparts over the year, mainly as a result of continued higher commodity prices and concerns as to the sub prime effect on global financial services companies. The returns for the quarter were negative. Local bonds and cash both underperformed the equity market for the calendar year, with cash (9.2%) outperforming bonds. Some of the highlights of the last quarter were: • Local equities reversed their upward trend returning -2.97%, whereas local bonds returned 0.93%. • Global equities and global bonds showed the same trend, being down 2.7% and up 3.0% respectively. • The Rand appreciated marginally against the Dollar (0.9%) and Pound (3.18%) but depreciated against (3.18%) the Euro (-1.9%) Asset Classes Local Equities Local Bonds Local Cash Global Equities Global Bonds Global Cash Q4 2007 -2.97% 0.93% 2.48% -2.71% 2.99% -0.04% 2007 19.19% 4.25% 9.18% 6.38% 6.65% 1.28% 2006 41.2% 5.6% 7.1% 33.5% 17.8% 16.7% 2005 47.3% 10.8% 6.6% 24.7% 6.7% 16.4% 3 Years to Dec 2007 35.34% 6.79% 7.63% 20.97% 10.33% 11.21% 5 Years to Dec 2007 29.27% 10.63% 8.38% 12.46% 1.88% -1.53% All returns over a one year period are annualized and are in Rands and are gross of investment fees 2. What to do in these volatile markets? We are seeing large movements in the prices of the assets that make up your retirement savings. We refer to these large market movements in a short space of time as volatility. Volatile markets highlight the benefit of a disciplined retirement investment strategy. In an environment such as this, where global markets are hit hard, the mindset of most investors turns from maximum wealth creation to wealth preservation. Many will be asking the question – “is it possible to actually protect capital?” The JSE All Share index is down 12% since the start of the year - thus wiping out 12 months of gains and bringing the index back to almost the same level it was in January 2007. It’s important to remember that volatility, while grabbing headlines, is not the biggest risk that many fund members face. For many the biggest risk is longevity risk, i.e. the risk of outliving your retirement savings. The fluctuations in your fund credit is an immediate issue, while longevity risk has no immediate concern, only surfacing many years after retirement, when you may outlive your savings. Trying to protect capital comes at the cost of lower returns. You may feel more comfortable with stable returns, but these will not be sufficient to provide you with an adequate retirement benefit. Many members will be tempted to try to time the markets and switch between various strategies based on their perceptions of future market movements. This is not a strategy we endorse as very few people, even the investment professionals, are able to do this successfully on a sustainable long term basis. So with this longevity risk in mind and the current volatility, let’s look at some lessons we have learnt when markets fell in the past, as they did for example in 1998 and 2002: • Growth assets, particularly equities, are needed to provide the higher returns required to provide a reasonable fund credit at retirement. These returns do come with short term volatility. • Diversification is a must. Funds invest in a variety of asset classes to reduce the volatility experienced by their members. • Not trying to time the market. Reacting after a market fall will only lock in losses. Have a plan of action, and change this based on lifestyle changes rather than short term market conditions. • preyour Align your pre-retirement investment strategy with your post retirement investment strategy, to ensure a seamless transition at retirement, therefore making the market conditions at the point of retirement far less relevant. • Considering periods following sharp declines in a positive light. Your next contributions are buying into a cheaper market representing greater value. You are likely to get a greater return from them as a result. Should your personal circumstances have changed, or you are nearing retirement, it is important that you consider your current investment strategy and discuss with your financial planner whether any change is needed. For those who are some way from retirement, it is best to sit tight and try to enjoy the bumpy roller coaster ride! Stellenbosch 3. Investments of the University of Stellenbosch Retirement Fund The largest portion of the assets of the University of Stellenbosch Retirement Fund (USRF) is invested in balanced market value portfolios. Allan Gray, African Harvest, Coronation and Investec are the asset managers that were appointed to manage the local portions of these investment portfolios. After thorough consideration, the Trustees of USRF decided in May 2007 to end the services of Investec and African Harvest, and two other asset managers, Foord and Prudential, were appointed in their place. The international assets of the Fund are managed in full by Allan Gray Orbis. The market value of these portfolios was as follows as at 31 December 2007: Asset Manager Allan Gray Coronation Foord Prudential Total Local Assets [Amount (% of total)] R413,067,149 (37.44%) R298,629,432 (27.06%) R193,504,762 (17.54%) R198,188,723 (17.96%) R1,103,390,067 (100.00%) International International Assets [Amount (% of total)] R184,706,703 (100.00%) Total [Amount (% of total)] R597,773,852 (46.41%) R298,629,432 (23.18%) R193,504,762 (15.02%) R198,188,723 (15.39%) R1,288,096,770 (100.00%) R184,706,703 (100.00%) The performance of the asset managers of the USRF portfolio and of the total Fund over the different periods up to 31 December 2007 was as follows: Asset Manager Allan Gray (Local) Coronation Foord Prudential SA Large Manager Watch Median SA Manager Watch Best Investment View Top Quartile Inflation + 5%1 Headline inflation Allan Gray (International) Index measure2 Total Fund Global Large Manager Watch Median3 3 months 3.9% -0.4% -1.9% -1.1% 0.0% 0.7% 3.2% 2.0% 1.2% -1.3% 0.8% -0.2% 1 year 15.4% 15.0% Not available Not available 15.6% 15.7% 13.4% 8.4% 8.8% 6.6% 14.6% 14.1% 3 years 31.8% 27.2% Not available Not available 26.2% 26.9% 10.7% 5.7% 18.3% 17.7% 26.0% 25.0% The Trustees continuously monitor and revise the investment strategy of the Fund, and the asset managers and their performance are also measured against the short- and long-term objectives of the Fund. Since 1 April 1999, the Fund has made use of the Investment Solutions Full-vesting Guaranteed Portfolio (the “Fullvest” Portfolio) as investment medium for the Capital Protection Option for members who are nearing retirement. With effect from November 2004, however, the Trustees decided to instead make use of the Investment Solutions Banker Portfolio for this purpose. The table below shows the value of and net returns on these two portfolios for the year ending 31 December 2007: Return Investment Solutions Banker Portfolio Investment Solutions Fullvest Portfolio 9.64% 20.89% Value R38,817,085 R10,534,040 4. Lifestage Model & CPO The Trustees of the Fund have recently completed an investigation into the Fund’s investment strategy and investment options, whereupon there was decided to make the following changes, effective 1 January 2008: 1. implement a lifestage model; and 2. make certain changes to the Capital Protection Option. The reasons for the changes and the details thereof are outlined below. INVESTMENT CURRENT INVESTMENT OPTIONS Fund members are invested in the Fund’s Balanced Portfolio. The majority of members are currently invested in this portfolio. However, members can also choose to utilise the Individual Investment Plan route, whereby members can compile their own personal investment portfolios with the aid of a financial advisor. Members who are older than 53 also have the option to invest their fund credits partially or fully in the Cash Portfolio (the Capital Protection Option). Certain costs and conditions are applicable in the event that these choices are exercised. 1 2 Based on November 2007 inflation figures. The measure is calculated on the basis of 70% of the MSCI World Index and 30% of the Global Bond Benchmark. (The Global Bond Benchmark is the weighted average of 40% Citi WGBI and 60% Lehman Global Aggregate.) 3 After provision has been made for investment fees. LIFESTAGE MODEL According to modern financial theory, investments in equities have a higher expected return than investments in bonds or cash. Historically, the Trustees followed an investment strategy which provided members with relatively high exposure to equities, and in so doing targeted high expected returns. Members were thus invested by default according to this strategy in the Balanced Portfolio. The underlying asset managers who manage this portfolio are currently Allan Gray, Coronation, Foord and Prudential. However, portfolios with higher equity exposure also tend to have more volatile returns and carry a greater risk of negative investment returns, especially in the short term. Individuals’ appetite for investment risk typically decline the closer they get to retirement. This implies that the fund credits of members who are far from retirement should have greater exposure to equities than those of members who are close to retirement, given older members’ greater aversion to risk. As members become older and move closer to retirement, the risk also increases that any negative movements in asset values can be realised in retirement, even though such movements might only be temporary deviations from the expected long term returns of an investment. Given the above factors, the Trustees decided to implement a lifestage model According to this model, members model. will initially be invested in a growth orientated portfolio (the Balanced Portfolio) and gradually be moved to less volatile assets (the Cash Portfolio) as they start nearing the expected retirement age. The Trustees investigated different models and after thorough consideration and taking into account the change in the University’s retirement policy, the following lifestage model was decided upon: • • The model will be implemented by default from the 1st of January that follows your 62nd birthday, i.e. 3 years before the 31st of December which follows your 65th birthday. Over the course of the 3 years, 4% of your total fund credit will be moved from the Balanced Portfolio to the Cash Portfolio every quarter. This can be illustrated by the following graph: Implementation of Lifestage Model 100% 90% 80% 0% 4% 8% 12% 16% 20% 24% 28% 32% 36% 40% Allocation between Portfolios 44% 48% 48% 70% 60% 50% 40% 30% 20% 10% 0% Tot 31 1 Jan Dec 62 63 1 Apr 63 1 Jul 63 1 Oct 63 1 Jan 64 1 Apr 64 1 Jul 64 1 Oct 64 1 Jan 65 1 Apr 65 1 Jul 65 1 Oct 65 31 Dec 65 100% 96% 92% 88% 84% 80% 76% 72% 68% 64% 60% 56% 52% 52% Age Balanced Portfolio Cash Portfolio • • • The target portfolio at retirement is 52% in the Balanced Portfolio and 48% in the Cash Portfolio. For members who turn 63 or older in 2008 the first switch in assets will only take place on 1 April 2008. You can choose at any time not to participate in this system, but if no choice is exercised, the switches will happen automatically. • • Ongoing contributions to the Fund will be invested between the Balanced Portfolio and the Cash Portfolio as illustrated in the graph. There is no increase in administration cost associated with the implementation of the lifestage model. In summary – when you join the Fund and if you are younger than 62, your contributions will automatically be invested in the Balanced Portfolio, unless: • You have chosen to utilise the Individual Investment Plan; or • If you are older than 53, you have chosen a different allocation between the Balanced Portfolio and the Cash Portfolio. When you reach age 62 and you have still not exercised any other options, the lifestage model will automatically come into effect. In the year in which you turn 62, you will be informed that you will participate in the lifestage model by default at the beginning of the following year, unless you exercise the option of following a different strategy (including staying fully invested in the Balanced Portfolio). You cannot choose to participate in the lifestage model from a different age, but if for example you want to replicate your own lifestage model, you are free to make quarterly switches in your own capacity. CAPITAL PROTECTION OPTION With the implementation of the lifestage model, the Trustees decided that the Capital Protection Option (CPO) would work as follows from 1 January 2008: • • • • • After your 53rd birthday you can choose to make a full or partial switch between the Balanced Portfolio and the Cash Portfolio. Switches will be carried out at the end of the month in which you make your choice. After you have switched, you will only be allowed to make another switch 3 months after such switch. After you have switched, you will only be allowed to make another switch 3 months after such switch. The limitations have been put in place to discourage members from making excessive short term switches between the Balanced Portfolio and the Cash Portfolio, but to simultaneously be flexible enough to allow members to replicate the lifestage model from an early age if, for example, they are planning to retire early. 5. Disability Cover As a result of changes to Stellenbosch University’s retirement policy, the possibility was considered of extending the maximum duration of disability cover from the age of 60 to the age of 65. It was initially expected that this would lead to an increase in the cost of the disability cover. Despite the improvement in the disability benefits, the University’s insurer, Capital Alliance, decided at the end of 2007 to marginally lower the risk premium! The decrease was possible because of the University’s good claims history and keen competition in the insurance market. It therefore is heartening to be able to inform you that the University could extend its maximum duration of disability cover to the age of 65 years without an increase in the premium rate. The abovementioned improved cover came into effect on 1 January 2008. 6. Third Dimension Policies In the past, Third Dimension Policies were offered to members to take advantage of certain tax benefits that resulted due to transfers out of the AIPS Fund (Associated Institutions Pension Scheme). A number of members have 3D policies with Sanlam, Old Mutual and Investment Solutions. These members may obtain the values of their policies by consulting the websites listed below. Members with 3D policies from Sanlam Sanlam: Go to www.sanlam.co.za and click on “Investment Funds” under “Daily Prices”. Then click on “Stratus”. A page containing the unit prices of various policies will open. Take the unit price for your particular policy, listed in the column titled “Retirement Fund”, and multiply the price by the number of units appearing on the statement originally issued to you. Members with 3D policies from Old Mutual Mutual: Go to www.fairbairncapital.com and click on “Products & Funds”, “Fund options”, “Price Summary” and “Ifrontiers Local”. A page containing the unit prices of various policies will open. Take the unit price for your particular policy, listed in the column titled “Retirement Fund”, and multiply the price by the number of units appearing on the statement originally issued to you. Members with 3D policies from Investment Solutions Solutions: Go to www.investmentsolutions.co.za. Click on “LOGIN” on the far left at the top of the page, and then on “Individual Investor Login”. Type in your PIN and password, and click on “Submit”. This will take you to a page on which your personal policy value is outlined. However, if you have not previously looked up the value of your policy on this website, you will need to phone the Investment Solutions Client Service Centre on 0860 001 750, or e-mail firstname.lastname@example.org to obtain a PIN and password. Funds 7. Preservation of Retirement Benefits & Preservation Funds The recent Alexander Forbes Member WatchTM surveys brought to light some interesting and important statistics regarding the importance of preservation of withdrawal benefits when resigning from a company and withdrawing from a fund. The Trustees would like to emphasise the importance of preservation and would therefore like to inform you of the following results of the surveys: • • • On withdrawal, very few members preserve their benefits; The low preservation rates result in poor retirement benefits; and It is very difficult to “catch up” if retirement savings is withdrawn. Net replacement ratio: This refers to the percentage of a member’s final salary he is able to replace after retirement, using the proceeds of his retirement fund. To illustrate the impact of the low rates of preservation, Alexander Forbes modelled a member contributing to a fund from age 25 to age 60, where the net retirement contribution (i.e. after costs) was 11.65% of salary. In this model, the member's expected replacement ratio, assuming full preservation, was 70% of salary. The model was then adjusted to reflect actual observed rates of withdrawal and preservation. The results were as follows: • • Using preservation rates observed for lower-income members, the replacement ratio reduced to 15.4%, a reduction of 78%! Using preservation rates observed for higher-income members, the replacement ratio reduced to 23.8%, a reduction of 66%! These figures emphasise just how important it is to preserve your fund benefit when you leave a fund and not to leave saving for retirement until it’s too late. Alexander Forbes also investigated the impact of retiring early on a member’s net replacement ratio at retirement. One of the most interesting findings was that a member with 20 years of service could expect to increase his or her net replacement ratios by about 40% by delaying retirement for 4 years. This is a function of a reduction in annuity costs as members become older and the additional savings that accumulates during the period. The major reasons members should expect low replacement ratios at retirement are: • The decision to retire early; and • The limited service that a member has with the final employer, if fund benefits from previous employers have not been preserved. The Member WatchTM surveys are available on the US intranet. Preservation Funds Preservation Funds have become the preferred option for members who decide to preserve their fund benefits on withdrawal from their company retirement funds. Though preservation is generally a very good idea, there are some rules members should be aware of. This article summarises these rules: • • A member may only transfer his/her benefit to a preservation fund in which his/her current employer had, prior to the member leaving service, been registered as a participating employer. The member has six months after the date of leaving service to indicate his preservation fund of choice. The withdrawal benefit may only be transferred to one preservation fund, i.e. the benefit may not be split, and no portion of the withdrawal benefit may be taken in cash. Once the benefit has been transferred to a preservation fund, it is possible to withdraw, prior to retirement, the whole or a portion of the benefits, as a taxable benefit. This option is only available once. It is possible to transfer benefits between preservation funds, although the cost of transferring may be prohibitive. Should a withdrawing member wish to transfer his/her benefit to a specific preservation fund in which his/her employer does not participate, arrangements have to be made, prior to the member leaving service, for the employer to be registered. There is no restriction on the number of preservation funds in which an employer may participate and there are also no financial implications for the employer in participating. It is not a difficult or tedious process for the employer to register as a participating employer. • • • 8. Alexander Forbes Online Alexander Forbes Online was developed to enable members to gain access to information regarding the value of their fund credits, investments, insurance and related services and products via the Internet. The website offers members easy navigation, functionality, and access to relevant information and educational material. Members need to register to gain access to the website. Simply go to www.afonline.co.za and choose “register” for access. You will find simple step-by-step information to guide you through the process. The purpose of AF Online is to fulfil the requirement of members to have easy access to their monthly updated fund values and you are invited to make use of this free service. 9. Nomination Forms & Benefit Statements Since the circumstances within families may change, all members are advised to review their death-benefit beneficiary nomination forms regularly, and to complete a new form if necessary. Benefit statements as at 31 December 2007 have already been sent to all members. Members are requested to check their statements carefully. Any queries regarding beneficiary forms or benefit statements may be directed to Mr Robert van Staden at 021 808 4822 or email@example.com. 10. Trustees of the Fund The following persons currently serve on the Board of Trustees: Employer representatives Prof JU de Villiers Prof N Krige Prof JF Smith Mr PG Steyn (Chairman) Employee representatives Mr WJ Adonis Mr L Burrows Mr PW Kloppers Mr BJ Mellor Mr G de Jongh Mr Japie Kotzé is the Principal Officer of the Fund and his contact number is 021 808 2754.