As 2025 brings fresh beginnings, many people take stock in the first month or two, committing to resolutions and reassessing lifestyle goals. From a financial perspective, you may be thinking about your budget or revising your investment plan. When it comes to assessing whether retirement portfolios are appropriately positioned, many investors – particularly those approaching retirement – feel ill-equipped to make necessary adjustments.
Regulation 37 of the Pension Funds Act was legislated back in September 2017 to support retirement investors. This regulation requires trustees of retirement funds to offer “default investment portfolios” to support and protect the investors who may not have the desire and/or skill to develop and assess their own investment strategy.
Belinda Carbutt unpacks the regulation and looks at the defaults offered by the Allan Gray Umbrella Retirement Fund with a focus on one of the key attributes, its three-year life-staging principle.
Getting familiar with the framework
Regulation 37 of the Pension Funds Act (Regulation 37) mandates that all defined contribution funds – retirement funds whose rules specify the contributions to be paid by the employer and member, but do not guarantee the retirement benefit – must offer a “default investment portfolio”. This includes umbrella funds. The regulation ensures that members who do not make an active investment choice are automatically placed in a portfolio that is considered to be appropriate and competitively priced.
The goal is to provide a simple investment option for retirement fund members, ensuring their investments are managed prudently even if they do not actively engage with their investment choices. The intention of the regulation is to ensure that trustees of retirement funds act as diligent custodians of members’ investments, aligning investment strategies with members’ long-term needs.
One of the key benefits of Regulation 37 is that it standardises governance and oversight in default options, ensuring that every member, regardless of their individual investment knowledge or involvement, benefits from a professionally designed investment strategy. This safeguard is particularly important given that many members may not have the expertise to make informed financial decisions independently.
Introducing the Allan Gray default investment strategies
The trustees of the Allan Gray Umbrella Retirement Fund make two default investment strategies available. Employers must choose one of these options as the default investment strategy into which their employees’ contributions will automatically be invested.
Employers can also create an “employer preferred portfolio” with the help of an adviser or consultant, however this cannot be used as the default investment portfolio. Employees can opt out of the default strategy and choose to invest in the other default, the employer preferred portfolio, if applicable, or any of the other portfolios on the Allan Gray Umbrella Fund portfolio list.
Allan Gray’s two default investment strategies are described below:
The Allan Gray default investment strategy
This strategy includes the Allan Gray Balanced Portfolio and the Allan Gray Stable Portfolio. The strategy is actively managed and suitable for members who want to only be invested in Allan Gray funds.
Multi-manager default investment strategy
This strategy includes the Multi-Manager Moderate Portfolio and the Multi-Manager Cautious Portfolio. This is also an actively managed strategy and is suitable for members who want to invest with Allan Gray and reputable third-party managers.
Both of the above default options are trustee approved and use a life-staging model (see below).
Adjusting for life-stages
Life-staging is an approach that gradually moves retirement investments from riskier investment portfolios to more conservative options as a member gets closer to retirement. Younger members, who have a longer savings time horizon, are invested in portfolios with greater exposure to growth assets, which will provide the best opportunity for their assets to grow over the long term and have ample time to recover if there is downturn. Members who are closer to retirement are invested in lower-risk portfolios to reduce the risk of permanent losses. This process of de-risking is intended to protect a member’s retirement portfolio from market volatility. Different providers have different strategies and timeframes when it comes to life-staging, with many beginning the process five to seven years prior to the member’s anticipated retirement date.
The Allan Gray default investment strategies are designed to automatically transition members’ retirement savings into portfolios that are appropriate for their investment horizon to retirement, with the retirement age being determined by their employer. The Allan Gray Balanced Portfolio and the Allan Gray Multi-Manager Moderate Portfolio are invested in growth assets and suitable for a long-time horizon, while the Allan Gray Stable Portfolio and the Allan Gray Multi-Manager Cautious Portfolio are lower risk portfolios suited for those closer to retirement. Life-staging, which takes place over three years, is optional – it may not be suitable for investors who plan to invest in living annuities and maintain a high allocation to growth assets.
Be aware of the trade-offs
We often get asked the question why our life-staging period is shorter than many other providers. As an investment manager focused on delivering long-term returns for our clients, we are acutely aware of balancing the various risks investors face. Two of the risks we closely manage are the risk of capital loss and the risk of an investment not keeping up with inflation over time. These are key risks faced by retirees. We selected a three-year life-staging period as our analysis suggested it was the period that presented the best trade-off between lower returns delivered by a less volatile portfolio, and the risk of a permanent loss of capital.
A member’s investment balance is likely to be at its maximum value close to retirement, thanks to contributions made over their lifetime and investment growth. The transition from a high-equity portfolio to a low-equity portfolio will likely result in about a 2% reduction in return per year. This loss of return compounded over multiple years on the maximum value of a member’s investment can have a material impact on the value of a member’s benefit at retirement.
This risk must be traded off against the risk of capital loss close to retirement which could arise from an adverse market movement. A large drawdown close to retirement, which takes place during or just after a market downturn, can have a significant impact on the value of a member’s benefit at retirement if they do not have sufficient time to recover from the downturn. This risk is particularly pronounced for members who will be locking in the value of their retirement benefit at retirement by accessing their benefit in cash or by purchasing a guaranteed annuity. It can also lead to members making sub-optimal investment decisions in reaction to short-term market movements, which can have an adverse impact on their outcome at retirement.
Our research team modelled member outcomes using different parameters for life-staging, including a longer transition period, and stress tested each strategy under various scenarios, including the 2008 financial crisis, to identify the optimal parameters. Their findings indicated that a transition period of two years, followed by a year invested in the low-equity portfolio, presented the best trade-off between these competing risks.
It is important to note that these results are specific to the performance and risk characteristics of the relevant Allan Gray and multi-manager portfolios and are not automatically transferrable to portfolios with a different risk and return profile.
Retirement portfolio decisions taken care of
As we set off on another year of financial planning and resolutions, default investment portfolios continue to ensure that retirement fund members are not burdened with excessive decision-making and are not left behind in the complexities of investment management.