Pension Shock

South African pension funds lost 9% of their value in the first three months of this year. And their performance over one year has been even worse - a loss of 12%.

Add inflation of around 9% to that, and the loss comes to a colossal 21%.

This means that South Africans from all walks of life - from factory workers to managers - would have done much better to have their money in bank savings accounts than in pension funds.

People retiring soon and those who face retrenchment will be hardest hit since fund managers are unlikely to recoup the losses in the short term.

And statistics show the median return by the 28 managers has not beaten inflation since 1998.

Over the past three years, the funds have made just 5% while inflation over the same period was 9%. Over the past five years, they earned only 7% while inflation was running at 7.5%.

The losses were sustained by professional money managers who can invest anywhere in the world, in any asset class. Yet only one management company, Allan Gray, managed to produce a positive return - 3.93% - in the past year.

Jan Mahlangu, Cosatu's retirement funds expert, said the government should require fund managers who fail to keep pace with inflation to explain themselves. He warned that the shocking figures meant a "very bleak" future for many South Africans.

"But it is not only about retirees," he warned. "We have been reading throughout this week that because of the strengthening of the rand, the mining industry and others are looking at retrenching many workers. For a person who is [newly] unemployed, you can't look at preserving those funds until there are positive returns: those people need cash now to survive."

James Downie, managing director of Assetbase, said: "Asset managers are fond of using the euphemism 'negative returns' but let's not be coy about it - in a defined contribution fund, a negative return is a loss to the members concerned. The industry also tries to sell the very long term to members, but members don't think long term."

Much of the uniformly bad performance can be attributed to chasing after so-called benchmarks, Downie said. If the benchmark is an underperforming index such as the FTSE/JSE All Share Index, beating the benchmark becomes meaningless - at least to a retirement fund member who is losing money.

Peter Armitage of Stanlib said the bonuses of retirement fund managers depended on their beating their benchmark.

Downie said: "Most of the asset managers are petrified of being different to their competition, because that will demonstrate that they have deviated from the benchmark.

"Managers know they won't be fired for being poor as long as the competition is equally poor. In some cases members will be told to be happy since they lost less than members of other funds."

Financial companies and the pension fund trustees who appoint them to look after their members' money should be offering different solutions, Downie said.

"Most South African asset managers offer investment products specifically designed to beat inflation by 6%. Benchmarks such as the All Share Index mean little to the average member. It is the inflation rate that is enemy number one and it should be targeted as such."

But fund managers remained optimistic about the outlook. Charles de Kock of Old Mutual Asset Managers said he believed market performance would improve.

Stanlib's Peter Armitage said: "It may be volatile but the worst is over."