How You Can Tailor Your Retirement Fund

Many retirement fund members do not realise that they have a choice when it comes to how their retirement savings are invested. While most people are aware that their money is being managed by a fund or financial institution, fewer understand that within the framework of Regulation 28 of the Pension Funds Act, they can often adjust how aggressive or conservative their investment strategy is. This is done by selecting a fund or investment portfolio that determines how much of their retirement savings is allocated to higher-risk assets like shares and property, and how much is held in more stable investments like bonds and cash.

This decision is an important one because the level of risk a fund takes on can have a significant effect on long-term retirement savings growth. Typically, younger investors are encouraged to choose more aggressive portfolios that invest a higher percentage of the fund in equities. Equities, or shares, are considered a higher-risk asset class because their value can fluctuate sharply over short periods. However, over the long term, equities tend to deliver stronger returns than more conservative investments, making them suitable for those with many years before retirement.

As investors get older and approach retirement age, it generally makes sense to reduce risk by moving to more conservative funds. These funds hold less equity and more income-producing assets like bonds and cash, which are less volatile but also tend to offer lower long-term growth. This shift helps protect the capital built up over the years from sudden market downturns, especially as there may not be enough time before retirement to recover from large losses.

One of the easiest ways for investors to see how aggressive or conservative a fund is lies in the fund’s factsheet. This document, also known as a minimum disclosure document, provides a breakdown of how the fund is invested. It shows what percentage of the fund is in equities, property, bonds, cash, and offshore investments. The factsheet also states the fund’s investment objective and includes a risk indicator, usually shown as a scale from low to high, giving a sense of the expected volatility of the fund.

To help classify funds further, the Association for Savings and Investment South Africa, known as ASISA, groups investment funds into different categories based on their asset allocation ranges. These categories give investors a good indication of how much risk a fund takes on and how aggressively it is invested. For example, a fund in the ASISA South African Multi-Asset High Equity category can hold up to seventy-five percent in equities. This category is typically suited to younger investors who can tolerate more volatility in exchange for the chance of higher long-term returns.

A Multi-Asset Medium Equity fund, by contrast, usually limits equity exposure to around sixty percent or less. This fund might be better suited to investors in the middle of their investment journey, who still want to grow their money but with a reduced level of risk. For those close to retirement or already drawing a pension income, a Multi-Asset Low Equity fund is often recommended, with much lower exposure to shares and a higher allocation to bonds and cash for stability.

It is important to note that, even in aggressive funds, Regulation 28 limits how much of a retirement fund can be invested in riskier assets. No more than seventy-five percent may be held in equities, no more than twenty-five percent in listed property, and no more than forty-five percent in foreign investments outside the common monetary area, which includes South Africa, Namibia, Lesotho, and Eswatini. These limits apply to protect investors from being overly exposed to volatile asset classes, while still allowing for sufficient growth potential within a diversified portfolio.

In recent years, Regulation 28 was amended to increase the foreign investment allowance from thirty percent to forty-five percent, providing retirement fund managers with greater flexibility to invest internationally. This has been particularly welcomed by aggressive funds seeking opportunities for growth in global markets. At the same time, the regulation clarified that cryptocurrencies are not permitted within retirement funds, on the basis that they are considered too speculative and volatile for long-term retirement savings.

For anyone saving for retirement, it is worth taking the time to review the factsheet of their current fund or consulting a financial adviser to ensure that the fund’s risk profile aligns with their personal investment horizon and comfort with risk. Making these choices early, and adjusting them gradually over time, can have a significant impact on the eventual value of retirement savings and the financial security enjoyed later in life.

In the end, while Regulation 28 sets the rules for what is allowed within a retirement fund, it still leaves space for investors to shape their investment strategy within those limits. By understanding how different fund categories work and learning how to read a factsheet, investors can make informed decisions that suit their stage of life and financial goals.