By George Bodo
It is a known fact that pension funds, in their quest to deliver returns that will maintain a pre-retirement standard of living for retirees, are faced with trilemma in their asset allocation—namely profitability, liquidity, and security.
Profitability is all about investing to achieve highest returns, liquidity rotates around the ability to answer to liabilities as at and when they fall due and security entails capital preservation.
In other words, it is a risk-reward balancing act. However, there is also a big concern that current asset allocation is too risk-averse and contributes to retirement poverty.
A 2012 survey by the Retirement Benefits Authority (RBA) revealed two unique characteristics of retirees (i) nearly all (94 percent) of the surveyed mentioned they have dependants (with the average number per retiree calculated as two dependants). (ii) All retirees surveyed earned monthly pensions that are below half of their pre-retirement monthly salaries.
This is the definition of retirement poverty, which, to a large extent, has roots in asset allocation. For instance, in 2018, fixed income instruments (Treasury bonds and bills as well as corporate bonds) accounted for 43 percent of asset allocation (FY2009: 47.5 percent) while property accounted for another 20 percent (FY2009: six percent). While this is an allocation that speaks to the security as well as liquidity component of the trilemma, it cannot deliver sufficient post-retirement earnings that can maintain pre-retirement standard of living for retirees…Read more>>
