The complex realities of retiring in SA

• Two-bucket system will allow members to take out up to a proposed third of retirement capital for emergencies

Iam not sure how much value a lone wolf adviser can add. Usually they have been trained in hard sales techniques at one of the life insurance agency forces. What they did was once called distribution. But now that distribution is so much more efficient through electronic channels it has been rebranded as “advice”.

The only firms that are really qualified to give advice in my view are the vertically integrated wealth managers, such as Investec Wealth, Sanlam Private Wealth, Citadel and NFB.

They get involved in helping families with managing intergenerational wealth. The common or garden financial planner is almost entirely focused on helping clients get to a comfortable retirement.

But it is certainly worth taking notice of what Paul Leonard, an advisory partner at Citadel, has to say about what he calls the current retirement conundrum. Leonard says the secret to retiring with enough money is really simple.

Start saving on your first payday, get inflation-beating returns and never touch savings until retirement day — and these days you don’t even have to start withdrawing until several years later than that. But when most of us start work retirement just seems so far away.

Leonard encourages “nudges” (an opposed to winks) in the right direction. He would like to see the immediate environment encourage and enable people to make good choices. And this is the background to the proposed “two buckets” system.

He talks of libertarian paternalism, which sounds a lot like Dave Foord’s investment philosophy. But in fact it refers to encouraging people to make the right decision by presenting them with a default, but still allowing them to make their own choices.

In the past when we changed jobs we were simply presented with a cheque (remember them?) on the day we left. Few of us were told about the option of moving our capital to a preservation fund or a retirement annuity. But now retirement capital will be preserved automatically on resignation, unless the member makes the active choice to cash it in.

When it comes to choosing the annuity on retirement there is something called a “soft” default, which is a logical contradiction. But as it is impossible to get out of a life annuity, or a with-profit annuity once it has started, a hard default would be dangerous, and could lead to court action against fund trustees.

Leonard says given the realities of SA, with high inequality and high unemployment, provision has to be made to let people dip into their retirement savings. The two-bucket system will allow members to take out up to a proposed third of their retirement capital for emergencies. But as he points out, it would involve changes to the Pension Funds Act for a start.

There is a special act of parliament that controls the huge Government Employees Pension Fund, and retirement annuities are also governed by separate legislation. The National Treasury talks of two incompatible goals — allowing limited withdrawals while simultaneously increasing savings and improving preservation.

It is anyone’s guess how much will be accessible; one third of capital looks reasonable but it has not been confirmed. It could end up as a fixed maximum rand amount available to be withdrawn. The definition of “an emergency” is also tricky. And would it be impossible to access the remaining two-thirds under any circumstances?

Municipal & General must be an even duller name than Old Mutual. So it is no surprise that the investment manager, which goes back to 1901, shortened its name to M&G. The less observant might assume it makes those sporty convertibles.

It was the first manager to launch a unit trust in the UK back in the 1930s. It is the controlling shareholder of Prudential Investment Management in SA. But the branding no longer makes sense.

Prudential Plc was split from M&G recently. Prudential is now focused on the Asian market, where it has been a pioneer of life insurance in improbable places such as Vietnam. So it was no great surprise when the local Prudential business announced it was rebranding as M&G. It can take comfort that the rebranding of Investec Asset Management as Ninety One went much more smoothly than expected. The local Prudential CEO, Bernard Fick, points out that M&G is the only international asset manager that has a full-service domestic asset manager in SA. Some have tried and failed, such as Franklin Templeton and Alliance Capital (now AllianceBernstein).

Fick says there is already strong integration of the investment teams. Marc Beckenstrater, the previous chief investment officer in Cape Town, now runs international funds tailored for the SA market out of London.

But Fick says there will be greater integration in the plumbing — areas such as compliance, risk and internal audit.

M&G has one of the gurus of tactical asset allocation in Dave Fishwick, who proved that tactical asset allocation adds value and is different from its speculative cousin, market timing.

With R286bn under management, what is now called Prudential in SA is in a sweet spot. It has the scale to be profitable, but it is not a supertanker that is so huge it has to invest almost entirely in the large index stocks.

GIVEN THE REALITIES OF SA … PROVISION HAS TO BE MADE TO LET PEOPLE DIP INTO THEIR RETIREMENT SAVINGS