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​Your ​​​​​​​​​​​​​​​​​​​​​​Legacy RA still Offers Excellent Value

1 June 2018

Older-generation retirement annuities still offer a lot of value, especially in turbulent economic times, writes Phomolo Dube, Chief Executive of Sanlam Closed Book.

Only 6% of South Africans will be able to retire comfortably and maintain the lifestyle to which they’ve become accustomed. This is according to the National Treasury, which cites a lack of client understanding of retirement savings products as the general reason. Therefore, clients tend to make investment mistakes on their path towards retirement.

If one considers that people are also living longer, thanks to advances in medical technology, a proper retirement strategy becomes paramount.

There’s a perception in some sections of the market that Legacy or so-called ‘older-generation’ products (be it retirement annuities, endowments or other product types) equate to bad value for clients. This perception is undeserved, especially in the case of Sanlam’s Smoothed Bonus Fund RAs (this also applies to our other non-RA Legacy products).

Over the past couple of years, retirement fund members have witnessed one of the most volatile investment periods in living history, and many members, rightly so, are feeling unsure about their investment choices.

This is not the time to panic but to consider carefully the benefit features and value these older generation plans offer.

Protection from market volatility

A substantial number of Sanlam Legacy RA funds have an underlying investment in Smoothed Bonus Funds, which means members benefit from the underlying portfolio’s investment returns through regular bonus declarations. In smoothed bonus portfolios, investment returns are smoothed by way of regular bonus declarations.

This results in stable and dependable investment returns, lessening the roller-coaster ride that investors in market-linked portfolios might experience. Just think of the global financial crisis in 2008, for example. These bonus declarations are based on the returns achieved on the portfolio’s underlying investments. However, some returns are set aside during periods of strong market growth to be used to boost returns during periods of weaker performance.

This reserve is then used to declare higher bonuses during periods of lower returns. Our Smoothed Bonus portfolios showed their worth during the 2008 global financial crisis, expertly navigating the difficult market conditions and providing peace of mind to retirement fund members.

Managing client expectations

This smoothing mechanism helps to manage client expectations. It offers clients the best of both worlds by helping them grow their money when markets are performing well and managing the effect of low returns during market downturns.

Keep in mind that smoothing merely changes the timing of when investment returns are released and does not reduce or increase the returns. Over time, the bonuses should produce a return similar to the underlying investment in the fund.

This provides an excellent option for clients who prefer steady growth over time rather than to expose themselves to the extremes of fully market-related products. When there’s a market downturn, those portfolios often still declare strong bonuses based on the surpluses built up before the downturn. Sanlam’s Smoothed Bonus Portfolios have also outperformed inflation significantly over the long term, thereby providing real returns to our clients.

Built-in guarantees

At maturity (or the option date) and death, the benefit payments on our Smoothed Bonus products are based on the book value of that policy, regardless of market conditions at that time.

The book value is calculated by accumulating the net contributions with declared bonuses. Depending on the product, bonuses can be vesting, non-vesting or a combination of vesting and non-vesting. Declared vesting bonuses cannot be removed or reduced for maturity (or option date) and death claims, thus providing built-in guarantees for the clients’ benefit.

Some of the policies have additional investment guarantees at maturity. Where applicable, the guaranteed amount is calculated by accumulating the net contributions at a contractual minimum rate. If the guaranteed amount exceeds the book value, the difference will be paid by Sanlam’s shareholders.

How smoothing benefits members

  • Smoothing reduces exposure to short-term market volatility.
  • It lessens the risk of investing in or disinvesting from the market at the wrong time due to circumstances beyond a member’s control, for example retirement or retrenchment.
  • It protects members’ capital and is suitable for members approaching retirement, or whose employment is vulnerable to economic changes, as well as those with a conservative to moderate risk profile.

A practical example of the benefits of smoothing

The blue line in the graph below is one of Sanlam’s Smooth Bonus funds and the orange line is an average Balanced Fund.

If Ben, as an example, was invested in an average Balanced Fund and retired six months later, when Jake does, during market downturn, his retirement savings would be substantially lower from market underperformance.

But if Ben invested in a smooth bonus product (the blue line), both clients would benefit from capital protection. However, in this case, Jake is in a better position when he retires thanks to the capital protection from smoothing.

This illustrates the importance of considering appropriate choices when it comes to retirement planning. A lot of clients can benefit from smoothed bonus type products, disproving the perception that the returns provided by Legacy products equate to bad value.

Sanlam Life Insurance is a licensed financial service provider.
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