Having considered the fact that one’s investment objectives change as a member nears retirement, the Board of Trustees has introduced a pre-retirement switch option for all members of Botswana Public Officers Pension Fund.In investments the time period during in which one invests is very important. It is one of the main factors that determine the risk one Wafford to take without adversely affecting their return objectives.It is important to point out that markets cannot be accurately timed and therefore no one can predict market cycles with precision.
Members who still have a long time before retirement have a higher ability to take risk. Should the Fund experience a loss, they have enough time to recover before they retire. Their objective, therefore, is primarily to grow their investments over time. To achieve this objective their money is invested in an Aggressive Portfolio. This portfolio tends to deliver higher long term investment returns, but in the short term may have sharp high returns or sharp low returns.
Members closer to retirement have a lower ability to take risk. In case of a loss they may not have sufficient time to recover before they retire. Their objective is, therefore, to preserve what they have accumulated over the years. To achieve this objective their money is invested in a Conservative Portfolio.
From April 2014, the Botswana Public Officers Pension Fund will offer members nearing retirement an option to switch from the more aggressive portfolio (i.e. the Active Member and Deferred Pensioner portfolio to the more conservative portfolio (the Pre-Retirement portfolio). Deadline for submission is 31st January of every year.
Aggresive VS Conservative Portfolios
An Aggressive Portfolio is one that includes different growth investment instruments that together can produce higher long term returns – such a portfolio tends to experience more periods of volatility. There will be time periods in which the portfolio delivers negative returns (or experiences losses). The expectation is that over time the portfolio would return significantly positive returns. From the beginning to the time of retirement, the overall return should be positive and higher than inflation over time.
A Conservative Portfolio, on the other hand, is a portfolio that includes investment instruments that together minimize the investment risk. The key objective is therefore to ensure smooth, positive returns that will, however, be lower.
Important Considerations
- If you intend to retire in 3 years and for any reason you decide not to retire after the three year period, you will not be able to switch back to the Aggressive Portfolio.
- A member may still be allowed to switch to a Conservative Portfolio, 2 years or a year into retirement.
- The decision to switch is the members’ sole responsibility.
Advantages & potential benefits of switching to the Preservation Portfolio
- Preservation of the capital amount – the portfolio is geared towards ensuring that the initial amount transferred from the Active Member and Deferred Pensioner portfolio, into the Preservation portfolio, is not reduced by negative investment returns (losses).
- The member is not exposed to more risky asset classes and the resultant sudden changes in investment returns.
- The member is not exposed to any currency risk
Risks of switching to the Preservation Portfolio
- On a comparative basis, during periods of strong equity market performance, the pre-retirement switch portfolio may be outperformed by the Active Member and Deferred Pensioner portfolio, hence delivering lower returns.
- Once the member switches to the pre-retirement switch, their investment shall not benefit from any favorable currency movements.
- No decision reversals shall be accepted by the Fund i.e once a member has exercised his option to switch to the Preservation Portfolio, under no circumstances will they be allowed to switch back to the Active Member and Deferred Pension Portfolio
Members closer to retirement have a lower ability to take risk. In case of a loss they may not have sufficient time to recover before they retire. Their objective is, therefore, to preserve what they have accumulated over the years. To achieve this objective their money is invested in a Conservative Portfolio.
