The ‘treat customers fairly’ regulation fails to answer the most basic of questions: what is fair for the investor? It evades this issue by listing six fairness outcomes that are, for the most part, vague and meaningless. The form of the investor experience may well change on the back of this initiative, but probably not the substance; the unfair distribution of investor returns is simply too ingrained in the industry DNA.

How rotten does an industry have to be, that it must be forced – by threat of sanctions – to treat its customers fairly? The FSB’s ‘treat customers fairly’ initiative is perverse, even if has noble intentions. Sadly, the unfair treatment of investors is so ingrained in the industry DNA that little will change.

Historical performance charts – typically showing dramatic outperformance over the benchmark – are often a source of envy and regret. The competitors’ envy is understandable, but the investors’ regret sometimes unnecessary, as they would have been just as well off investing in the benchmark. The reason is that relative performance charts are based on the time-weighted return, before the impact of fees. Investors however receive the money-weighted return, after fees. The money-weighted return is typically lower than the time-weighted return (as the fund grows over time, so opportunities and outperformance moderates), and more often than not, the bulk of the outperformance is pocketed by the fund manager in fees. The upshot: assuming active management risk and paying high fees pays off on rare occasions, but for the average investor it is a losing strategy.

This is the second part of our study exploring the return prospects of the key local asset classes – SA Equity, Bonds and Cash – both individually, and combined within a balanced portfolio. In 10X literature, we often refer to the 5% real return that our retirement investors should expect to earn from a balanced portfolio over the long term. Given the above average returns in recent years, and the market turmoil over the past three, is that still a reasonable expectation? Our study – considering mean reversion principles and the factors driving financial markets over the last decade – suggests that retirement investors should anticipate lower, possible even below-average returns ahead. In Part 2 we examine the outlook for SA Bonds and Cash, and the likely impact on balanced portfolio returns.

In 10X literature, we often refer to the 5% real return that our retirement investors should expect to earn from a balanced portfolio over the long term. Yet investors have done much better in recent years. Given the above average returns in recent years, and the market turmoil over the past three, is that still a reasonable expectation? Our study – considering mean reversion principles and the factors driving financial markets over the last decade – suggests that retirement investors should anticipate lower, possible even below-average returns ahead. This will make it even more important to follow a consistent and adequate savings strategy, and to keep a watchful eye on fees, to prevent the retirement industry pocketing an even larger share of returns. In Part 1 of this two-part study we explore the outlook for SA Equity.

The Occupy Wall Street movement has been criticized for its lack of agenda and failure to articulate clear grievances. Simply protesting against inequality is not enough – that has been around since the Middle Ages. What is required is an understanding that investment banks are simply another player in a zero sum game, namely the global bun fight over finite investment returns. And that the rules are unfairly skewed in its favour, resulting in an inordinate transfer of wealth from the many to the few. That is what we should protest against, this grand scale pilfering of our retirement savings.

Around the world, regulators and commentators are grappling with the same issue: finding the most pragmatic and effective way to fund workers’ retirement. Their suggestions, for the most part are simple, obvious and just plain common-sense. So much so, in fact, that it begs the question why they have not already been implemented. The short answer is that it is not in the retirement industry’s interest to do so. Fortunately, South African retirement investors do have an alternative: the 10X Funds (Umbrella, Preservation and RA) already incorporate these suggestions.

The shift to defined contributions retirement funds has served employers and providers, but not investors. But expecting the financially illiterate to secure their own pension was a bad idea from the start, founded on hope and expediency rather than rational belief. That foundation has long since collapsed under the weight of instant gratification, procrastination, ignorance, deception and greed. The past damage cannot be undone, but the system can be fixed, to give young savers a fair shot at a decent retirement.

Save 15% for 40 years to secure your retirement success, or so the standard industry mantra. It works well as a sound bite, but how well does it work in real life? Based on investment returns over the past 110 years, not so well. Other factors come into play, and unless these align favorably, the probability of achieving a ‘decent’ retirement is unacceptably low. Couples, in particular, can expect a high probability of success only once the contribution rate increases to 20% or the investment term lengthens to 45 years. Both possibilities seem remote, throwing into question are our accepted expectation of a predetermined retirement date.

Although the number of South African pension funds has halved in recent years, many stand-alone funds still persist. An international study now confirms that large pension plans outperform smaller ones by between 40 to 53 basis points per annum. The main reasons: lower costs, more negotiating clout and stronger governance. The impact of this performance gain on the long-term savings outcome is material, certainly enough to question why remaining stand-alone funds still resist the idea of umbrella funds and an independently-controlled board of professional trustees.