By John Anderson, Head of Client Solutions, Alexander Forbes

Retirement fund members are used to thinking about their current standard of living in terms of income, so why should they not be doing the same thing for how they would like to live in retirement? Let’s not forget what retirement funds are there for in the first place namely to provide you with the ability to maintain a good standard of living in retirement. This is not the unrealistic pictures of the elderly couple on a yacht or sitting on beach in an exotic destination.

We therefore submit that the appropriate objective and goal for a retirement plan is to provide members with a stream of income in retirement.

Theoretically the concept is a sound one that was successfully used by Defined Benefit (DB) funds for decades. However, due to employers not being willing to take on the risks relating to these schemes as well as individuals’ preference to have a say in how their retirement savings are managed, there has been a marked shift to Defined Contribution (DC) funds.  When these funds were established the focus was on the amount of savings and not the income (which should have been the purpose from the outset).  We aim to change that.

The information and technology that DC funds have, up till now had at their disposal, has prevented the industry from fully embracing this concept of targeting an income in retirement. Approaches thus far have centred on defining a risk tolerance for DC fund members based on one single parameter – age – which is only one key element when defining an individual’s financial circumstances.

The telling statistic from the most recent Alexander Forbes Member Watch™ Survey which show that only 5% of members on the Alexander Forbes retirement platform of (1.4 million members) can afford to retire comfortably is evidence that this system is not working.

There are many reasons for this, one being that the typical retirement fund has communication and solutions structured based on the “average” member.  However, as we know we are all unique.

The Alexander Forbes Clarity™ framework aims to provide an automated pre-retirement solution for individuals, focusing on a targeted income goal at retirement. In designing the solution, we focused on each individual to define their personal income goal at retirement, instead of adopting a “one-size fits all” approach that characterises many retirement schemes in the country.

At its core, Alexander Forbes Clarity™ centres on defining a personalised liability as an income goal at retirement for each member (taking their unique circumstances into account).

The income goal is set so that a member is able to maintain their standard of living in retirement and tailored for the time the member spends in the fund. With each member’s income goal in mind, a personalised investment strategy is created for each member to give them the best chance of meeting their goal.

All communication is framed with the income goal in mind and provides members a gauge of whether they are on track to meet their goal and what actions they can take, if they are off track, on a regular basis.

Alexander Forbes Clarity™ automatically adjusts as various factors impacting an individual’s income in retirement change – essentially it is the driverless car of the retirement industry. The concept of Alexander Forbes Clarity™ has been designed in in line with our outcomes-based Living*Investing approach.

The Living*Investing framework is a risk-led, forward-thinking investment approach aimed at achieving client objectives with greater certainty over their lifetime.

Our approach in delivering this framework involves assisting clients balance their unique needs across their life journey as they make trade-offs in allocating financial resources, with the objective of ensuring they can meet future income needs into retirement with a level of certainty and dignity. Alexander Forbes Clarity™ is a major step in making use of a best-of-breed approach to assist our clients in this journey.

As opposed to other goals-based strategies, analysis is done automatically within the retirement fund without any intervention required by members, and investment strategies are automatically designed for each member. Other approaches may make generic tools available for members to use, and require members to opt into a finite range of portfolios using information from the tools. Therefore the onus is on the member, to use the tool, correctly and assimilate the output and take appropriate action.

Alexander Forbes Clarity™ does not only focus on the assets of a member (accumulated savings) but has an emphasis on including existing preserved assets in the equation but more importantly, human capital. Human capital is the largest single asset most members will have for a significant part of their early working life. Alexander Forbes Clarity™ further improves on current lifestage frameworks as per the table below:

  Current Lifestage frameworks Alexander Forbes ClarityTM framework
Investment goal Focuses on maximizing the member’s account balance. Focuses on targeting personalized income goals.
Measure of success Maximum account balance Maximum chance of meeting income goals
Access to individual advice Individuals encouraged to source their own advice outside of the fund.

In practice, the difficulties of obtaining individual advice using traditional models and the costs thereof have meant few individuals had been able to access advice.

Individual advice is automatically built into the solution at low cost as a result of technology and is regulated under the FAIS legislation.

Annual reviews are undertaken to ensure the individual is on the right track.

Access is provided to call center support.

Investment strategy Members are often transitioned into lower equity/higher cash portfolios as they approach retirement in lifestage strategies.

Typically only age is used to differentiate members and trigger transitioning. Higher cash allocations may not keep pace with changes in the cost of securing an income at retirement

Personalised investment strategy that takes each members’ unique circumstances into account.

The factors taken into account are the member’s age, gender, contribution rate, salary progression, retirement age, account balance and future contributions.

The investment strategy includes an allocation a bespoke annuity hedging portfolio (as opposed to cash) that is expected to track the member-specific cost of the securing an income at retirement.

Communication Focuses on account balance and investment returns relative to market benchmarks. Focuses on member-specific income goals and whether the member is on track to achieve these goals. Importantly, Alexander Forbes Clarity™ informs members of the corrective action that can be taken if they are not on track to achieve their goals and does so, well before they reach retirement age.

 

Overall, our comprehensive financial well-being ecosystem is designed to assist in improving personal and employer balance sheets over a lifetime. Our solutions are underpinned by global best practice through our partnership with our major shareholder, Mercer.

ENDS

www.alexanderforbes.co.za

Issued by Corporate Image on behalf of Alexander Forbes