• Bruce Cameron

The dichotomy between what pension scheme members want and what they get

The one thing an investment linked living annuity (also known as a living annuity, or illas) does not do is give pensioners a secure income flow. Few pensioners are likely to be financially secure until death. The advent of Covid-19 and the junking of South Africa’s debt makes it far worse when share prices and dividend payments drop.

Most living annuity pensioners had already received a serious body blow even before the virus and the downgrade of South Africa’s debt, with many already having high drawdowns.

Despite this, 90% of South African pensioners want living annuities on which to retire, while at the same time research undertaken by Sanlam and Just SA finds that 87% of retirees want security of income.

Retirees cannot expect security of income if they invest in living annuity. The only way to achieve this is through buying a guaranteed annuity.

You need to compare living annuities and guaranteed annuities very carefully if you want guarantees.

Historically, living annuities and traditional annuities have both been subject to their own controversies. Way back in the 1970s, Sir Donald Gordon, fed up with the unfair selling of investments to policyholders by life assurance companies, set up a new way of selling investments, namely linking the return to actual underlying investments; and he started what was the Guardrisk unit trust company as one of the choices.

Among other things he also did, was to offer the first stand-alone property portfolios, including by starting Sandton City.

Gordon, however, never got rid of some of the underlying life assurance faults, such as selling combined life and investment policies which allowed policyholders to be stripped of most of their assets if they reduced or stopped paying contributions. The life assurers showed no mercy on no payment, no matter what the cause, from losing your job through to a severe illness.

And to encourage selling, he supported the practice of using upfront commissions paid to financial advisors. They were paid all commission on any policy in the first two years.

Gordon was one of the first people in the life assurance industry to speak out publicly and strongly on the use of living annuities. He warned that they would lead to eventual poverty, particularly for people who had high-risk investments and high drawdowns.

Clearly, he was speaking from self-interest, but there was a greater truth to his words if he had foreseen Covid-19 and the junking of South Africa’s credit.

Within a few years of the launch of living annuities there was the technology bubble, in which many living annuity pensioners were over-invested and lost significant amounts of retirement capital.

The investment companies, particularly in the early years, did nothing to stop the misselling of living annuities, and in fact encouraged much of the misleading sales talk.

When newspaper criticism of living annuities started, it was the actuarial profession which started looking very carefully at them, in particular analysing drawdown rates and investment returns. One of the major conclusions was that your starting rate should be below 5% of your retirement capital. With the levelling of investment markets, prior to Covid-19, this was lowered to below 4%.