There is much life in lifestage investment portfolios, it seems. Their popularity among retirement funds has increased over the past few years, and compared to other investment structures they are delivering highly competitive results. They are also an excellent solution to National Treasury’s proposals for post-retirement default annuity options.

In the current economic climate of modest investment returns, it is crucial that retirement funds invest wisely to provide members with the best returns possible.

Today even aggressive Regulation 28-compliant balanced funds are achieving investment returns closer to 12%, compared to the rich investment returns in 2012 and 2013, often above 20%. Lifestage products are delivering well however.

The results of the 2014 Sanlam Benchmark Survey revealed that 57% of retirement funds surveyed indicated they were offering a lifestage portfolio, compared to 44% of funds in 2013 and 37% in 2011.

The main advantage of a lifestage investment product is that it provides members with the opportunity to invest in a single strategy that is appropriate for the whole of their savings careers. The investment strategy combines portfolios from many different investment managers to provide age-appropriate investment portfolios that de-risk automatically as individual members grow nearer to retirement.

Lifestage portfolios provide an excellent solution to the high prevalence of retirement fund member apathy with regards to their investment choices. Members tend to make a choice – assumed to be appropriate at some point – and then never review that choice again. This results in ineffective investment strategies and insufficient funds at retirement. Lifestage investing makes allowance for an investment strategy tailored to each member’s retirement horizon. As a result, members can invest appropriately for their risk profile without the increase in costs that is often associated with investment choice, while also catering for member apathy and inertia.

Broadly speaking, lifestage strategies invest aggressively before a member reaches a specific period before retirement. This could be anywhere between three and seven years during which the investment strategy would be structured to reduce risk in an attempt to preserve accumulated retirement savings.

A shortcoming of lifestage strategies is that a cash strategy is often followed near retirement, with the aim of preserving accumulated capital. However, it is at this critical stage that a classic lifestage strategy can lose its power – preserving capital does not necessarily help members retire with sufficient income.

The trick to setting up an appropriate lifestage strategy is to make sure that the correct risks are addressed at the right time. Aggressive investments are used long before a member’s retirement to offset the risk of insufficient investment returns over the member’s working life. When nearing retirement, the risks should be managed to best support the goal of comfortable retirement.

There are a number of financial needs to consider in securing this goal. Most lifestage models have three or more end stages, with the most common being living annuities, followed by inflation-linked annuities and with-profit type annuities. These broad categories tend to suit the majority of individual members’ needs.

Lifestage investment portfolios provide the “perfect answer” to Treasury’s proposed default options for retirement funds. We believe lifestage portfolios provide the default solutions that would put most retirement fund members in a much better position as they approach retirement, which is after all the objective of Treasury’s proposals.



17 March 2015

By Willem le Roux, Head: Investment Consulting