Offering staff a retirement savings scheme or a second-pillar pension scheme means, in fact, offering them deferred income. Whether their capital increases in value or is chipped away by inflation depends very much on investment choices. Given such risks, surely the best thing an employer can do is to assist their staff in managing their retirement savings! Put another way, it means making sure that income is there in full when it is most needed, i.e. on retirement. Here are a couple of tips to help you boost the value of your staff’s retirement savings
Money-market funds: loss in purchasing power guaranteed
For several years now, money-market funds have been posting negative or nil net returns. Nevertheless, these funds still make up 16% of employee savings assets. With this type of investment, savers can only rely on one thing: losing purchasing power! Over the last 10 years, inflation has swayed between 0 and 2% per annum. This means that savings assets that have stagnated over all that time have, in fact, lost almost 10% of their value since, at the end of the day, they would purchase 10% less.
Consequently, money-market funds should only be seen as limited-term investments, for example, for savers close to retirement or expecting to purchase their principal residence in less than two years time.
Returns on Euro-denominated funds have dipped below inflation
The Euro-denominated funds that can be accessed via second-pillar pension schemes have been experiencing falling returns for the last 10 years. They are invested mostly in bonds and the low rates offered by new issues over recent years are impacting performance. In 2018, according to an estimate from the consumer association CLCV, returns from Euro-denominated funds have been averaging 1.7%, whilst inflation has been running at 1.8%. 10 years ago such funds were still producing returns of 3.64%. These investments, which for decades used to combine security and yields are beginning to resemble money-market funds. When investing over the long-term it is best to look elsewhere.
Long-distance horizon and measured risk: opt for equities
When preparing one’s retirement, it is best to align risk with one’s investment horizon. In other words, if the planned retirement date is in 10 or more years then a saver has every reason to choose higher risk investments that produce better yields, such as equities. Shares are subject, of course, to sharp movements up and down over the short-term. However in the long run, such shock waves cancel each other out and a trend becomes visible. According to figures from AFG published on 28 February 2019, employee savings assets invested in equities, lost 3% in value over the previous twelve months. Yet this has not prevented them from progressing 135% over 10 years, i.e. an annual yield close to 9%.
Guided management is the key to employee retirement savings
Ideally, employees with retirement savings assets should put their money much more into risky equities and then gradually shift into more secure vehicles as retirement date approaches. This is the service provided by so-called guided management and which needs no action on the part of savers. Guided management offers an asset-allocation schedule previously determined with regard to retirement date. For example, 15 years off from retirement date, assets can be invested entirely in equities and then move progressively into bonds and money-market vehicles to arrive at 100% money-market on target date.
Guided management is the default option in Perco plans. Under the so-called Pacte Law, this becomes the rule for all retirement savings schemes. This is the solution that should be preferred by everyone who does not consider him or herself as a wealth management expert and should bring back efficiency and coherence to employee retirement saving arrangements. Guided management should, naturally, be adapted to the member’s profile and his or her risk appetite.