We all dream of a retirement where we have a stable and sufficiently large income to last our lifetime. Increasingly, investors are also concerned about what the world will look like when they retire, especially if factors like climate change and economic inequality go unchecked. Retirees without a sustainable retirement income can become a financial burden on the state and informal support networks around them, while environmental and economic risks threaten the stability of our social and financial systems.

This article considers an investment strategy for defined contribution funds that addresses the two ideals of a sustainable retirement income for members and a sustainable world in which they can retire. The strategy is called retirement-driven investment.

Retirement-driven investment (RDI) balances the growth and risk of retirement income and enhances the environmental, societal and economic sustainability of our tomorrow.

WHY ARE SUSTAINABILITY IDEALS IMPORTANT IN THE SOUTH AFRICAN CONTEXT?

Investing for a sustainable retirement income is a direct act of social sustainability. This is because insufficient retirement income means that the financial cost of supporting elderly South Africans shifts to:

1. Government, in the form of the “old age grant”. This crowds out scarce developmental and social spending that could have been used to provide education, nutrition, healthcare, labour skills training, housing and policing.

2. Families (for instance, siblings and children) and communities (neighbours, church groups, friends etc.). This displaces wealth accumulation and education spending for future generations.

Resources available for these competing needs are particularly strained in South Africa, in part due to decades of structural deprivation. We will later show how the regulator has entrenched this interpretation (sustainable income as sustainable investment) in a best practice guidance notice to retirement funds.

 The risks to an environment, a society and an economy worth retiring in are becoming increasingly obvious. The sustainability of all three of these systems is necessary to create a world in which we want to spend our retirement years. We have recently witnessed the KwaZulu-Natal floods that saw over 400 deaths, more than 8 000 homes destroyed and approximately R25 billion worth of damages to infrastructure. Aside from the tragic human cost, the consequences of damaged infrastructure also have longer-term social implications – as discussed above, government resources get diverted from other social needs.

According to the World Weather Attribution group, the probability of flooding in eastern South Africa is now twice as common, given the impact of increased greenhouse gas emissions on the planet’s temperature.

HOW DOES RDI ADDRESS RETIREMENT INCOME SUSTAINABILITY?

Our regulator, the Financial Sector Conduct Authority, offers retirement fund trustees guidance on how to pursue sustainable investment, via Guidance Notice 1 of 2019 of the Pension Funds Act. This sustainability notice endorses a “liability-driven investment philosophy”. We regard a liability-driven investment as one that relies on investment choices being directly linked to the financial goal of the investor.

RDI applies a liability-driven investment philosophy and sets our baseline asset allocation after considering the impact this has on the level and variability of future retirement income. Before choosing a baseline asset allocation, we use mathematical and actuarial techniques to project:

Retirement investment is a multi-decade problem, sometimes involving over 80 years of cash flows interacting with market performance. RDI incorporates this information-rich structure, which is fundamental to addressing retirement income sustainability.

ASSETS THAT ENHANCE SUSTAINABILITY

Our RDI approach to responsible investing is built on Old Mutual’s Responsible Investment Guidelines and incorporates Old Mutual Investment Group’s ESG integration and stewardship capabilities. The RDI exposure to world and emerging markets tracks the MSCI ESG Leaders Indices, which target companies with the highest environmental, social and governance rated performance in each sector.

In addition to our general responsible investment policies, RDI has an explicit Decarbonisation and Just Transition Framework for fixed-income investments. The following principles are important in this investment framework, and helped shape our own policy:

FAIRNESS. To achieve fairness, we consider the positive and negative consequences of investments on all stakeholders. Balancing these needs is challenging. Wherever possible, we prefer relying on partial or full consensus across nation states, and across societal sectors within South Africa, based on scientific evidence.

COORDINATED, COLLABORATIVE ACTION. The policy strives to work with, not in parallel with, other sectors of society and global cooperative frameworks. This creates space for incorporating contributions from the United Nations, the Paris Agreement signatories, the South African government, industry, labour, academia and civil society. We treat existing, formal, binding framework commitments by the South African government and other Paris Agreement-aligned states as a starting point. We consider justifiable, sustainable changes to these formal policies, rather than non-aligned efforts with no reference to these global, collaborative frameworks. We are constantly guided by the objective of a 1.50C cap to global temperature increases over pre-industrial levels and aim to clearly reconcile changes from existing frameworks with this goal.

EVIDENCE-BASED DECISION-MAKING. We aim to balance:

• Prioritising science-based decision-making

• Timely decisions that recognise the urgent need to address climate change; and

• Getting buy-in from stakeholders to help galvanise change.

IMPROVING OUR CHANCES OF A MORE SUSTAINABLE TOMORROW

The consequences of an insufficient and unsustainable retirement income are dire, both for individuals and for society at large – as support needs to be extended at the cost of other important developmental and social spending initiatives.

A sustainable investment strategy for defined contribution funds must target a sustainable retirement income, in addition to using the more familiar ESG principles that ensure assets purchased and sold contribute to a sustainable environment, society and economy.

The only way that these challenges can be met is if we all take a multi-decade view and work together in a coherent and an urgent manner in managing members’ retirement capital. Ultimately, members want a comfortable retirement above all else. This requires a world worth retiring into and sustainable retirement income.