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Determining member contributions

Annexure B to the Financial Sector Conduct Authority Circular PF 130 (PF 130) recommends the following considerations be applied when dealing with specific funds and deciding on suitable investment objectives.


Defined benefit funds

The board should consider the following to properly understand the obligations of the fund, namely:

  • Whether the contributions are to be increased to keep pace with the cost of living;
  • Whether the pension formula adjusts to increases in salaries over time, or whether such increases need to be granted to keep the formula current;
  • How fund obligations are spread among the categories of members and former members, and, within these categories, by age and time to retirement;
  • Whether changes in employment levels or conditions will change patterns of retirement;
  • Important ancillary benefits contingent on full or partial retirement;
  • Any planned changes to the fund.

In addition, factors relating to solvency ratios and the maturity of the fund must also be taken into consideration.

Defined contribution funds

In defined contribution funds it is recommended that the following factors be taken into account when the board is discharging its investment


  • Needs and reasonable benefit expectations of the beneficiaries;
  • Mix of members and related growth and risk tolerance levels;
  • Variation in risk tolerance levels of members of the same age group;
  • Ability of members to choose investment options – in this regard, the board should consider providing ongoing information and training to members to enable them to make informed decisions.

In addition, the board should monitor default accounts for members who have not indicated an investment option, the participation rate and the investments selected by members. The purpose of such monitoring being to assess whether changes may be required in communication and/or education programmes offered by the fund to its members and pensioners.

Liability-driven investing

In recent years there has been a steady move away from defined benefit funds, where the employer carries the investment risk for the fund having to guarantee the member’s pension after retirement, to defined contribution funds where the member carries the risk. This move has been driven by factors such as longevity risk, lower interest rates and increased market instability. For defined benefit plans that are still active, liability-driven investment (LDI) strategies, a specific approach to investing, has become an attractive option through which to reduce the risks associated with pension liability.

The core idea of the LDI approach is identifying the liabilities of an individual or institutional investor and then understanding the risks of any investment strategy relative to these liabilities. The objective of LDI investment is not necessarily to maximise the return of the investment portfolio, but to maximise asset performance. Thus, LDI is geared towards gaining enough assets to cover all current and future liabilities of the member.

Life stage modelling

Life stage modelling is another approach to financial planning for retirement. The objective of the life stage model is to manage a member’s ability to withstand risk at various life stages over the course of their working lifetime. In summary, the model assumes that members who are just starting out their working lives, and have a longer time horizon until retirement, are in a position to take greater investment risks; whereas older members, having shorter time horizons until retirement, have a greater need for safeguarding their capital and should subsequently opt for a low-risk investment strategy.

Employer and employee contributions to retirement savings

In both defined benefit and defined contribution schemes there may be both employer and employee contributions to a member’s retirement savings. Employees make deposits (contributions) to an account. Contributions are deducted from the employee’s pay; some companies match those payments, while other companies contribute a fixed percentage of the employee’s salary. Government gives a tax benefit to these payments in the form of rebates or tax deductions so as to incentivise employees to prepare for their financial needs post retirement.


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