The appropriateness of a life-stage investment strategy as a default option in South African retirement funds

Abstract: In recent years, the South African retirement industry has seen a shift from the use of defined benefit funds to the use of defined contribution funds. With this shift has also come a shift in responsibility as retirement fund members are now responsible for making sure that they retire financially secure. Many defined contribution funds in South Africa offer members an investment choice with default investment strategies attached, which automatically invest a member’s contributions into a preselected investment portfolio, should they neglect to make an investment decision. The National Treasury has proposed the compulsory implementation of default investment strategies in all South African defined contribution funds. The proposal will require trustees of a retirement fund to ensure that the default investment strategy is appropriate. A popular underlying investment portfolio in South African default investment strategies is the life-stage portfolio. Taking into account the proposal and popularity of life-stage portfolios, it was determined that an investigation into whether or not a life-stage portfolio would be an appropriate investment portfolio to be used in South African retirement funds’ default investment strategies, was necessary. In order to investigate the research question a Monte Carlo simulation was conducted for a hypothetical retirement fund member. Ten investment portfolios were compared in the analysis. It was concluded that a life-stage portfolio would be appropriate in certain circumstances, and inappropriate in other circumstances in a retirement fund’s default investment strategy. It can therefore be said that there is no single “one-size-fits-all” investment portfolio that should be used in all default investment strategies, but rather different investment portfolio options that perform better under different circumstances. This study recommends that retirement funds should be evaluated on their specific membership profile when selecting an appropriate investment portfolio to be used in their default investment strategy.M.Com. (Finance