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May 28, 2020

Smoothed bonus portfolios: All you need to know

By Solly Tsie, Head of Research: Investment Consulting

Smoothed bonus portfolios are investment portfolios, offered by life insurers, that provide a guarantee on the money invested into the portfolio and the returns passed on to investors in the form of bonuses declared by the insurer. Sometimes these portfolios only provide a partial (less than 100%) guarantee.
Generally, people who invest in smoothed bonus portfolios are conservative investors, who expect to be shielded from negative returns, especially in times of market stress like we have experienced recently.
The recent unexpected negative bonus declarations in April 2020 by Old Mutual and concerns around a number of smoothed bonus portfolio funding levels dropping to as low as 80% and 85% in March 2020, have raised questions as to whether these portfolios can continue to deliver on their expectations. This also begs the question, should future contributions from investors be directed elsewhere, while the funding levels are well below 100%?

What can we expect from smoothed bonus portfolios in the next year or so?

The graph 1 shows that there is a strong correlation between the funding level of a typical fully vesting smoothed bonus portfolio, and subsequent 12-month returns.
When the funding level dropped below 100%, investment performance over the next 12 months was disappointing, even when compared to cash. This is because a smoothed bonus portfolio declares smaller bonuses when the funding level falls below 100%, in order to build up reserves and improve the funding level.

Graph 1: Funding levels and returns over the following 12 months

The reduced funding levels as of late are expected to result in lower bonuses (even lower than cash returns) in smoothed bonus portfolios, at least for the next 12 months, even if investment markets recover.

If I have invested my money in smoothed bonus portfolios, what should I do?

The expected low future bonuses may cause some investors to consider switching out of smoothed bonus portfolios. However, investors need to be aware that insurers will impose a market value adjustment penalty on investors who switch out of smoothed bonus portfolios when the funding level is lower than 100%, unless this switch is deemed to be a “benefit payment”.

For example, if a smoothed bonus portfolio is 90% funded, an investor who switches out of the portfolio may be subject to a 10% market value adjustment. The penalty protects the investors who stay invested in the portfolio. If a large group of investors is allowed to withdraw from the smoothed bonus portfolio without the market value adjustment, this would result in a further deterioration of the funding level.

Typically, a benefit payment that allows for the market value adjustment to be waived includes a withdrawal from a retirement fund because of a termination of service or retirement, and monthly income withdrawals for pensioners with living annuities. There may also be special individual member switching conditions that allow for a very limited number of investment switches at full value out of a smoothed bonus portfolio at specific dates.

It is clear that most investors should therefore remain invested in their chosen smoothed bonus portfolios.

However, there may be merit in considering a different investment portfolio for ongoing contributions until the funding levels recover. The decision on future contributions should be considered carefully, based on specific conditions (the size of the contributions, the number of members affected, the frequency of the contributions) and the funding level of the relevant smoothed bonus portfolio. There may also be other constraints such as member administration processes that do not allow for a different strategy to be adopted for ongoing contributions in a retirement fund.

Return profile of smoothed bonus portfolios

The graph 2 shows the investment performance of a typical smoothed bonus portfolio compared to a growth investment portfolio, with no smoothing of returns. The graph shows investment returns over rolling 12-month periods. The returns of the growth investment portfolio fluctuates much more than those of a typical smoothed bonus portfolio. Additionally, the smoothed bonus portfolio would have protected capital in times of negative market performance. Note the investment returns in the smoothed bonus portfolio have not been negative over the period considered. It is the return profile of the smoothed bonus portfolio that makes it attractive to conservative investors.

Graph 2: Smoothed bonus portfolio vs typical investment portfolio with no smoothing of returns applied



Source: Retirement Fund Monitor. The smoothed bonus portfolio is represented by one of the major insurers’ fully vesting smoothed bonus portfolio, which provides a 100% capital guarantee. The typical investment portfolio is represented by the average of the Wealth Creation portfolios as per the Retirement Fund Monitor. A Wealth Creation portfolio is a portfolio consisting mainly of growth assets such as shares and property, which may be appropriate for a young retirement fund member.

Recent investment performance of the smoothed bonus portfolios

The following table shows the investment performance of a number of smoothed bonus portfolios in the market compared with the average return of aggressive multi-asset portfolios (Wealth Creation) and conservative multi-asset portfolios (Capital Preservation) in the Retirement Fund Monitor. The investment performance applies over various periods to 31 March 2020.

Level of Capital Guarantee Category: Guaranteed and Smoothed Bonus Portfolios 3 Months 1 Year 3 Years 5 Years 10 Years
100% Alexander Forbes FullVest 1.6% 5.9% 6.5% 7.3% 9.4%
Old Mutual CoreGrowth 100% 2.3% 7.4% 8.2% 8.4% 9.9%
Sanlam Monthly Bonus Portfolio 1.6% 6.8% 7.0% 7.9% 10.2%
SMM Vesting Fund 1.4% 6.1% 6.0% 7.2% 9.1%
Metropolitan MM Smooth Growth (G) 1.5% 3.9% 5.0% 7.1% 10.3%
Metropolitan MM Smooth Growth (L) 0.5% 1.4% 5.1% 11.5% 14.0%
Metropolitan Smooth Growth (G1) 1.5% 4.8% 5.2% 7.5% 10.7%
90% Old Mutual CoreGrowth 90% 2.6% 8.5% 9.3% 9.5% 11.0%
80% OMIGSA Absolute Stable Growth 1.4% 5.5% 6.5% 7.8% 10.8%
Sanlam Stable Bonus Portfolio 1.8% 7.5% 7.6% 8.4% 11.2%
Sanlam Progressive Smooth Bonus Portfolio 1.8% 7.9%
50% OMIGSA Absolute Smooth Growth 1.5% 6.0% 7.0% 8.3% 11.3%
  Average of Funds 1.6% 6.0% 6.7% 8.3% 10.7%
  Median 1.5% 6.1% 6.5% 7.9% 10.7%
  Inflation 1.5% 4.6% 4.2% 5.2% 5.1%
Performance of multi-asset portfolios
Average Wealth Creation -13.7% -9.3% 0.9% 2.8% 8.9%
Average Capital Preservation -7.8% -3.3% 3.6% 4.6% 8.0%

Source: Retirement Fund Monitor

The return profile above shows that smoothed bonus portfolios are doing their job well to protect investors’ capital in times of market stress. All the smoothed bonus portfolios included above have outperformed the average aggressive (wealth creation) and conservative (capital preservation) portfolios over all periods presented. This highlights the effective capital growth and capital protection ability of these portfolios.

Having said this, we need to consider the lag in the time it takes for the smoothed bonus portfolios to reflect the poor performance in the market and the underlying assets they hold. Often bonuses are declared a month in advance. So the returns above do not consider the drop in market values in March 2020.

Recent developments in smoothed bonus portfolios

In an unprecedented move, Old Mutual recently declared a -5% bonus for April 2020 in their 50% and 80% capital guarantee portfolios in the Absolute Growth Portfolio (AGP) series. Although we would argue this move was unexpected, this practice is permitted in the terms and conditions of these portfolios, as the portfolios only offer a partial capital guarantee. It is important to note that we are going through a financial crisis that seems to be worse than the Global Financial Crisis of 2009.

A negative bonus was declared to improve the funding level in the portfolio. Based on the latest information Simeka has received from Old Mutual, the funding level of the AGP series is now around 95%. The stronger funding level was aided by the strong performance in investment markets in April 2020 and the -5% bonus declaration.

Examples of the additional measures taken by different insurers are as follows:

  • Opening new pools for new investor contributions to start at 100% funding levels and be able to declare better bonuses compared to older pools with lower funding levels.
  • Temporarily closing the portfolios to new investors until a later stage when insurers will assess the environment for further action.
  • Closely monitoring the smoothed bonus portfolios and taking prudent measures such as declaring lower bonuses.


Smoothed bonus portfolios have been around for a long time. We believe these portfolios remain appropriate to some investors, particularly those who are close to retirement, in retirement, or conservative in nature.

We see the benefit in smoothed bonus portfolios, as they provide capital growth to investors via their underlying market-linked exposure as well as explicit capital protection through the smoothing of returns. These portfolios meet an investor’s need for growth asset exposure at a lower level of risk, although this comes at a price (capital premium). It is important that investors choose a portfolio that meets their needs, and that they understand the fees and charges levied. For example, a smoothed bonus portfolio that provides a partial guarantee will have a lower capital charge, but there is a risk that the portfolio may experience a negative return in times of market stress.

These portfolios have pitfalls that should be understood by investors. At the end of the day, the insurer manages a portfolio of assets for investors and smooths the performance over the long term by holding back on returns in good times and passing these returns on to investors in troubled investment times. Some may argue this practice is unfair, especially those who exit after periods of good market performance, as they do not benefit from this performance because the insurer holds back on returns to build reserves.

In times of deep stress in investment markets, as we experienced in the Global Financial Crisis of 2008/9 and the COVID-19 pandemic crisis in 2020, the value of the underlying assets managed by the insurer can suddenly drop, resulting in a situation where the smoothed bonus portfolios are underfunded. Investors can expect that returns will be lower than cash in the short term (notwithstanding the reduction in interest rates), as insurers work hard to build up reserves in these portfolios.

Smoothing of returns in a market crash is very valuable to retiring members and members drawing an income in retirement. However, investors must remember that it is possible that partially vesting smoothed bonus portfolios may declare a negative bonus or take away a portion of the bonuses previously declared in times of market stress. This will create significant unhappiness for investors who do not fully understand the terms and conditions of the portfolios they invest in.

Investors should seek the advice of investment advisers or consultants when considering their next course of action.

Appendix: Key features of smoothed bonus portfolios

The table below summarises key features of smoothed bonus portfolios that are important to understand before discussing the performance of some of the larger smoothed bonus portfolios and the recent decisions taken by insurers, and providing insight to investors.

Definition •       Smoothed bonus portfolios hold back returns in times of strong performance and allocate these returns in times of poor performance.

•       This practice is known as smoothing of investment returns.

•       Smoothed bonus portfolios aim to reduce typical fluctuations in investment returns earned.

•       They provide explicit protection whereas absolute return portfolios that are often considered as an alternative, only provide implicit protection.

Level of capital guarantee •       100% capital guarantee means that 100% of the money invested and bonuses declared by the insurer are guaranteed.

•       When the guarantee level is less than 100%, say 80%, the insurer has the right to declare a negative bonus of up to 20% in times of financial market stress.


Capital charge •       The capital charge is a fee paid by investors for enjoying a level of capital guarantee.

•       The lower the level of capital guarantee offered by the insurer, the lower the capital charge.

•       The capital charges on fully vesting portfolios are generally higher than on partially vesting portfolios.

Fully vs partially vesting •       Fully vesting portfolios mean that if the investor disinvests from a smoothed bonus portfolio, they are eligible to receive all of the capital invested and bonuses declared.

•       Partially vesting portfolios mean that when insurers declare bonuses they will state how much of the declared bonus is vested and how much is non-vested. The non-vested portion is not guaranteed and the insurer can reduce the non-vested portion to zero in times of financial market stress.

Book value vs market value •       The book value is the sum of initial capital invested, ongoing contributions and declared bonuses.

•       The market value is the value of the underlying investments in a smoothed bonus portfolio.

Funding level •       Funding level is the ratio of market value to book value.

•       If the market value is greater than the book value, a smoothed bonus portfolio is said to be fully funded or overfunded.

•       If the market value is lower than the book value a smoothed bonus portfolio is said to be underfunded – the value of the assets is less than the book value guaranteed.

Disinvesting •       Investors who involuntarily have to disinvest from the portfolios – e.g. due to the need to receive retirement fund benefits as a result of an event such as resignation, retirement, death, disability or retrenchment – will receive the book value.

•       Investors who disinvest from a smoothed bonus portfolio due to a voluntary action (such as switching from one portfolio to another) generally receive the lower of book value and market value.

•       If smoothed bonus portfolios are underfunded, voluntary disinvestments will lead to proceeds lower than book value.