Evolutionary Awards – Alexforbes Retirement Navigator

Category: Evolution in investments

Describe your evolution:

Alexforbes Retirement Navigator – helping members/investors navigate a growth journey for retirement.

Alexforbes Retirement Navigator is an evolution of traditional smooth bonus fund products – historically the domain of traditional insurers.

Features of a ‘traditional’ smooth bonus fund.

• The insurer invests in an underlying market linked portfolio that generates investment returns and has a market value (MV).
• The insurer delivers returns to policyholders by declaring a bonus (often monthly) that will impact the value that is provided to policyholders – also referred to as the book value (BV).
• The insurer (typically) provides some sort of guarantee on the BV for certain policy benefits, e.g., 100% or 80% for withdrawal and retirement benefit payments.
• While benefit payments are paid at book value, certain disinvestments, e.g., switches and terminations, may be paid at market value – if this is less than book value. Where such a lower market value is paid, it is referred to as a market value adjustment (MVA).

These products face the following criticisms:

• The insurer charges a capital charge for any partial or full guarantee that is offered – over and above the charge for asset management. Historically these charges have been between 1% pa and 2% pa, depending on the nature of the guarantee. This capital cost reduces the net amount of assets that are available to be distributed to policyholders.
• A perceived lack of transparency and/or understanding of the underlying mechanics that drive the investment experience, has detracted from these insurance policies.
• Typically the insurer is also the asset manager. This creates a ‘product’ conflict in that the insurer creates a captive market for its own asset manager.
• The insurer determines (and controls) the investment strategy. This creates a further conflict in that the insurer may wish to invest with an objective to protect its balance sheet, whereas the policyholder may have an objective to maximise the investment returns earned.

The world of smooth bonus funds evolved when providers introduced more transparency in the product management process. Alexforbes Retirement Navigator is a further evolution:

• Remove any capital guarantee – to manage costs.
• Separate out the balance sheet governance of the insurer from the investment manager, Alexforbes.
• Provide more transparency about investment returns. Cleaner link to the known investment return history of a well established portfolio – Alexforbes Performer.
• Better management of the cross-subsidy that exists between different generations of policyholder – and less cross-subsidy than other smooth bonus products.

Alexforbes Retirement Navigator was ‘conceptualised’ by Alexforbes as an investment manager that wanted to help investors on their journey:

• Provide access to credible real growth over time
• Comfort members by reducing short term volatility of returns.
• Articulate a robust, ‘fair’ and transparent bonus distribution methodology.

While Alexforbes Retirement Navigator does not provide any capital guarantee, it provides much of the smoothing benefit associated with insurer smooth bonus funds by declaring less-volatile returns/bonuses for investors.

The balance sheet concern is greatly reduced – returns/bonuses can be negative. The investment strategy is ‘unhindered’ by a desire to protect the insurer balance sheet.

Alexforbes is able to focus on delivering the investment returns to clients in a way that Alexforbes believes offers value. This applies both to the underlying investment engine – Performer – and develop an advice led smoothing framework – to reduce cross-subsidy and deliver returns to clients in a reasonable manner.

Momentum, as the insurer, can focus on providing the governance framework to manage policyholder expectations and ensure that policyholders are treated fairly.

There is a cost associated with using Momentum as a service provider for the portfolio.

With no capital guarantee there is no need for a capital charge, which assists with costs.

The bonus framework benefits from the technical/actuarial, advice-led (client-focused) perspective of Alexforbes as well as the balance sheet (and related policyholder) perspective of Momentum.

As with other smooth bonus products, Alexforbes Retirement Navigator pools experience to diversify the investment experience by time. This implies a degree of cross-subsidy to provide a smoother investment journey. The evolution of a potential negative bonus enables better management of the cross-subsidy impact.

What does this mean for retirement fund investors and members:

• Exposure to a credible long-term growth portfolio to generate real underlying investment returns.
• Much of the smoothing benefits provided by more traditional smooth bonus products in managing the volatility of returns in the short term.
• Lower capital cost to investors because there is no guarantee.
• Less cross-subsidy than more traditional smooth bonus products.
In addition:
• Alexforbes Retirement Navigator meets the conditions outlined in the FSCA Conduct Standard 5 of 2020 (RF) for the use of smooth bonus funds in a Regulation 37 default investment strategy.
• Alexforbes Retirement Navigator pays out Savings Component withdrawals at the smooth book value. No market value adjustment is applicable on Savings Component withdrawals.

Alexforbes Retirement Navigator has application for retirement fund investors who want exposure to growth asset classes – for longer term growth – but are concerned about short-term volatility associated with those asset classes – for various reasons. For example,

• A single portfolio investment strategy for the duration of the investment journey.
• A ‘de-risking’ portfolio in a defined contribution life-stage model in the period just prior to retirement.
• A living annuity investment – to manage ‘sequence of returns’ risk.

Describe the impact your evolution has had in response to its identified challenges and targeted outcomes.

Managing the short-term experience towards long term growth

Alexforbes Retirement Navigator was launched on 1 April 2022. We can discuss the actual portfolio performance from that date. Momentum also applied our bonus declaration framework to the actual returns that were earned on the Performer Life portfolio from October 1997, its inception date, to show how Alexforbes Retirement Navigator would have performed prior to 1 April 2022.

The following summary to 30 June 2024 gives an indication of how Alexforbes Retirement Navigator has delivered returns earned by Performer Life over the same period to members / investors.

Performer Life Alexforbes Retirement Navigator
Returns
1 Year 11.4% 10.4%
3 Years 11.0% 12.3%
5 Years 11.4% 11.1%
10 Years 9.4% 9.6%

Standard Deviation
1 Year 8.0% 1.6%
3 Years 7.8% 2.2%
5 Years 9.4% 2.7%
10 Years 8.4% 2.3%

10 Year metrics
#negative months 39 4
Max month 10.0% 2.1%
Min month -8.4% -2.3%
Max Draw Down -11.9% -2.3%

Returns for periods longer than a year are shown as a percentage per year.

Returns for periods prior to 1 April 2022 were calculated by Momentum.

These returns demonstrate that Alexforbes Retirement Navigator generates a return for members / investors that is in line with the return earned on the underlying Performer Life portfolio, i.e., investors remain invested in the long-term growth portfolio. However, the return is delivered with significantly less (monthly) volatility due to the smoothing framework.

Our contention is that the lower volatility of returns helps manage behavioural biases associated with uncertainty and experiencing loss. If these behavioural biases are managed it will result in members remaining invested in growth generating asset classes for longer, to help drive better retirement benefit outcomes.

It should be noted that these returns are gross of policy charges, which are typically around 0.20% pa higher for Alexforbes Retirement Navigator than they are for Performer Life. This additional expense for the smoothing needs to be weighed up against the benefit of the more stable investment journey.

We also see how the cross-subsidy impact can benefit a consistent experience for members of the same fund who may receive their benefits at different times. For purposes of illustration, consider a retirement account for a member of R10,000 as at 31 March 2022, with no further
contributions.

We can compare how his amount would have progressed for different retirement dates from 30 April 2022 to 30 November 2022 if it was invested in Performer Life relative to Alexforbes Retirement Navigator:

Performer Life   Alexforbes Retirement Navigator
Starting Value                10 000              10 000
30-Apr-22                        9 877                10 077
31-May-22                       9 931                10 156
30-Jun-22                         9 513                10 167
31-Jul-22                          9 822                10 176
31-Aug-22                        9 816                10 158
30-Sep-22                        9 559                10 255
31-Oct-22                         9 947                10 261
30-Nov-22                      10 293                10 269

We see that the value that a member may receive when invested in Alexforbes Retirement Navigator is more stable relative to the value invested in Performer Life. Alexforbes Retirement Navigator better manages fluctuations associated with short term timing of when the benefit is received.

Supporting Documentation >