WHAT YOU SHOULD KNOW ABOUT YOUR PENSION

WHAT YOU SHOULD KNOW ABOUT YOUR PENSION

By: CRAIG AITCHISON

While early reaction in the Eurozone seems to have resulted in the worst of the European sovereign debt crisis being averted, the long-term ramifications will be widely experienced by ordinary citizens across the globe, including millions of South African pension fund members.

The long-term economic implications of last year’s sovereign debt crisis are expected to manifest themselves in slower economic growth as fiscal policy is tightened and Europe experiences structurally higher unemployment and higher dependency ratios.

Market factors ultimately point to lower investment returns for pension funds. This means that retirement fund members may need to increase the amount that they are contributing to their funds in order to stay on track for retirement.

It is crucial for members to know what their current savings are, and what they actually need to achieve their retirement goals and other long-term financial objectives. Members can also take steps to ensure that they minimise their exposure to risk by diversifying their investments.

Members should ask for information on the mix of assets in their retirement fund, and to be aware of how this mix changes, especially if the fund should offer a range of investment choices. Ask for advice from the fund or a qualified financial advisor regarding the appropriate level of risk, and whether you are saving enough.

Pension funds in turn, should fully understand their actual exposure to risk. In order to ascertain this, trustees need highly detailed information on the actual investment instruments in the fund’s investment portfolios. For example, it is important to know if the fund’s investment managers hold any bonds issued by European countries and if so, what the extent of this exposure is.

Pension funds must also decide on the level of exposure to risky assets that is appropriate, given the profile of the fund membership. This level of exposure must then be constantly monitored and kept under control.

It is imperative for funds to have a well-diversified foreign and local investment strategy and to stay aware of what the sovereign debt crisis means for their funds.