INVESTMENT GUIDE BPSA Provident Fund

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Investing your fund contributions for a better future

By investing your contributions to the BPSA Provident Fund in professionally managed, risk controlled portfolios, your chances of achieving the retirement outcomes you want are maximized.

Of course, as with any investment, it is essential that you fully understand the options available

to you as a BPSA Provident Fund member, and that you choose the investment/s that best

match your personal risk preferences and your money growth objectives.

What’s more, since this is money that you are putting away for your retirement, it is important

that you periodically assess your investment choices and adapt them, if necessary to match

your changing risk and return requirements as you get nearer to your retirement age. The good

news is that the BPSA Provident Fund offers you investment solutions that can do this for you

automatically over time, but more about that later in this guide.

For now, let’s dive in and make sure that when it comes to understanding what investments

actually are, we’re all on the same page.

It’s a proven fact that a well-considered investment plan can help you create the financial security and freedom you desire in the future.

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What is an investment, and what types are there?

There are many kinds of these market-based investments, ranging from equities and bonds

to properties and cash instruments. It is the job of the BPSA Provident Fund to make sure that,

as a member you have access to the best possible combination of these investment assets,

combined and managed by proven experts, so that you have the best chance of growing

your retirement money without putting it at undue risk.

Investing is essentially the act of committing your money to something (in this case an investment fund) with the purpose of growing that money or getting back more than you put in. That means an investment could be anything you buy that grows in value over time, like good art or a house. Of course, when it comes to growing your retirement money, the investments used are more along the traditional lines of shares, funds and other market-linked opportunities.

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What makes a good investment?Every person is different and has different objectives and preferences when it comes to investing. That said, any good investment will do two basic things. Firstly, it will offer the best possible opportunity to grow the money you have invested over time. Secondly, it will manage the risk your money is exposed to and minimize that risk in line with your preferences as an investor. So, for example, you may have some money that you are prepared to lose, but that you want to invest for the most growth possible. In that instance, it would be alright to invest the money in a high risk, high growth investment. Maybe that could be funding a business venture or buying a piece of art from an upcoming new artist. But if you are approaching retirement, you probably want to protect your money more than you need to grow it. In that example a low-risk investment that offers the possibility of some growth, but also minimizes the chances that you will lose any of your capital, would be the best choice. In the end, then, a good investment is one that meets your growth needs while also offering you the protection you want against losing money.

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To deliver on its responsibility to grow and protect its members’ retirement money, the BPSA Provident Fund offers three investment options as follows:

1. The BP LifeStage Model for cash or with-

profit annuity (Fund default option).

2. The BP LifeStage Model for a living annuity.

3. A customized investment strategy that

includes a range of approved portfolios.

All these investment portfolios are offered and

managed by Sygnia Asset Management,

which is a leading multimanager investment

management company in South Africa.

So, what are your investment options?

Deciding which of these options to choose

can be a daunting and confusing affair,

but given that this is your retirement we’re

talking about, it’s very important that you

make the right choice. That’s why we have

unpacked all three investment options, in

simple detail, on the following pages. A word

of caution though: While the information in

this guide will give you a good idea of what

each investment option involves, it’s always

a good idea to discuss your options with a

qualified financial adviser before you make

a final investment decision.

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But what is actually getting invested?

Your entire Fund Credit is invested in order to grow over the long term and help you achieve the retirement you deserve. This is effectively the total amount that you have in your Fund ‘account’ at any time. It is made up as follows:

T he total amount contributed to your Fund by BPSA and you (if applicable) for the full time

you have been working for BPSA;

PLUS

Any growth that has been earned through the investment of the contributions;

PLUS

Any amount that was transferred into the BPSA Provident Fund from a previous employer’s

retirement fund that you contributed to (if applicable).

LESS

Any costs or expenses.

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Every month, the Fund contributions made by BPSA on your behalf, as well as any additional contributions you may make, are also invested in whatever investment portfolio you have chosen. Over time, these contributions, plus the investment growth they earn, steadily accumulate so that you can use all the money to buy a pension when you are ready to retire.

This investment model has been designed to

offer you a LifeStage approach to investing

for retirement. What this means is that as you

go through various stages in your life, your

investment will be adjusted to match your

changing growth needs and risk preferences.

This model has two main objectives:

1. To help you secure a reasonable retirement

lump sum that represents an acceptable

replacement ratio at retirement. The

replacement ratio is the percentage of

your salary in the year before you retire

that your pension represents. So, if you

were earning R20 000 in month before

you retired and your pension income after

retirement is R15 000, your replacement

ratio would be 75%.

2. To manage and minimise the impact of any

short-term market movements (volatility)

on your investment capital when you get

near to retirement. The las thing you need

is for the investment amount you’ve built

up over the years to be reduced by a

market downturn just before you retire. This

LifeStage portfolio minimizes the chances

that this will happen.

About with-profit annuities

The BP LifeStage Model for cash or with-

profit annuity is designed to meet the

investment needs of Fund members who

will most likely buy a with-profit annuity

and/or take some or all of their benefit in

cash when they retire. A with-profit annuity

is a product you buy from an insurer with

your Fund Benefit. That insurer then pays

you a monthly pension that is guaranteed

for the rest of your life. The insurer decides

how much monthly pension you start with

and then you get increases every year,

in line with the investment performance

of the money you gave the insurer. This

means that if the markets do badly, you

may not get a pension increase some

years, or it could be lower than inflation.

But you will never get a pension that is

lower than your starting amount.

For more info about your annuity options

at retirement, read the RETIREMENT

GUIDE.

A CLOSER LOOK AT YOUR INVESTMENT OPTIONSOPTION 1: THE BP LIFESTAGE MODEL FOR CASH OR WITH-PROFIT ANNUITY

NOTE: This is the default investment portfolio of the BPSA Provident Fund. If you don’t let the Fund know that you want to invest in one of the other options, your Fund Credit and contributions will automatically be invested in this option.

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The portfolios making up this investment

option are as follows:

How the LifeStage Model worksThe LifeStage approach means that when

you are a younger Fund member, you will

have your Fund Credit invested in the Long

Term portfolio. This is to maximise the growth

potential of your invested money. Then,

when you reach the age where you have

just over six years left until your retirement,

your investment is phased out of these riskier,

high-growth assets into more conservative

portfolios. This is to protect the money you

have built up from any losses near to your

retirement.

The diagram below gives a visual idea of

how this phased LifeStage approach to

investment works.

The final asset allocation is the same as that

recommended for a retiring fund member

who is buying a with-profit annuity. This means

that the transition from retirement investor to

pensioner will be relatively seamless.

Investment Portfolio

Underlying Investment Portfolio

Long Term Portfolio Signature 70

Stable Portfolio Signature 40

Income Protection

PortfolioMoney Market

100% 100%

80%

60%

40%40%

20%

60%

75%

25%

75% 75%

25%25%

100%

80%

60%

40%

20%

0

Long Term

Stable

Income protection

BP LifeStage Model funding for cash

Term to retirement (years)>8 7 6 5 4 3 2 1

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Like Option 1 explained earlier, the BP

LifeStage Model for a living annuity also

invests according to your growth and risk

management needs as you progress through

your life towards your retirement. When you

are younger, the model invests your money in

higher risk portfolios that target high returns.

However, as you get closer to retirement,

your investments are adjusted to prioritise

the protection of your capital over growth.

At age 53, your Fund Credit will be phased

into a more conservative investment position

over a period of months. This transition is

gradual, with some of your portfolio being

transitioned each quarter until you are 54.25

years old. By that time, your investment

will primarily be in the conservative Stable

Portfolio.

The diagram below illustrates this phased

LifeStage Model funding for a living annuity.

It shows the percentage investment in each

portfolio linked to the age of the Fund

member.

OPTION 2: THE BP LIFESTAGE MODEL FOR A LIVING ANNUITY

100% 100% 100%90%

80%70%

60%50%

10%

40%50%

20%30%

100%

80%

60%

40%

20%

0

Long Term

Stable

BP LifeStage Model funding for a living annuity

Term to retirement (years)>8 7 6 5 4 3 2 1

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About living annuities

The asset allocation of this model in the final year before your retirement is the same as

what BPSA Provident Fund recommends for anyone who wants to buy a living annuity

when they retire. A living annuity is a product that you buy from an insurer with your

retirement benefit when you retire. In return, the insurer pays you an agreed pension

every month. Unlike a guaranteed or with-profit annuity, you can choose where your

retirement benefit money gets invested and how much you would like to get as a

pension (as a percentage of your total investment). This means you are not guaranteed a

pension for life because if you get a pension that is more than the returns your investment

makes every month, eventually your money can run out. For more information about

your annuity options, read the RETIREMENT GUIDE.

The investment returns you get under this LifeStage Model can be more volatile than under

Option 1 and you will have slightly less risk protection because the investments target more

growth.

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Where will your money be invested?A diverse investment portfolio with exposure to various types of assets classes is not only the best way to manage risk, but also to ensure that your money has the best possible chance of growing steadily over time. Both of the BP LifeStage models follow such a diversified investment approach, with portfolios mainly made up of a combination of the following types of investments (asset classes):

• SA Equities – These are shares of companies

listed on a securities exchange, like the

JSE. The various fund managers charged

with managing your investments may

have different equity investment styles, but

they are all given specific mandates, or

instructions, aimed at growing the money

entrusted to them through active equity

share selection.

• SA Bonds – These are what are known as

fixed-interest instruments. Bonds are issued

by governments or corporate entities

and can provide an investor with higher

investment returns than cash.

• SA Inflation-linked bonds - Inflation-linked

bonds are issued by the SA government.

These differ from conventional bonds

in that the capital amount increases

with inflation. Investors therefore receive

income in real terms and an inflation-

adjusted capital amount on redemption

of the bond

• Cash – Money-market instruments are

investment vehicles that simulate cash,

but often give a higher return than you

would get just by putting your money in

a bank account. They are a good way of

ensuring the liquidity (quick access to the

money by the manager) of the portfolio

and protecting your capital from risk.

• SA Property - This covers a wide variety of

real estate investments, from office blocks

to property funds. This is a medium- to high-

risk asset class which is directly linked to

movements in the South African industrial,

commercial, retail and residential property

markets.

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If you are confident about your knowledge and understanding of investments, you can choose to tailor make your Fund investment strategy. To do this, you can choose any combination of the following portfolios that have been approved by the Fund Trustees:

• One or more of the investment portfolios

from the BP LifeStage Model. This includes:

- Signature 70 (Long-term portfolio)

- Signature 40 (Stable portfolio) and

- Money Market (Income protection

portfolio)

• The Islamic Balanced Fund (the Shari’ah

compliant portfolio)

Important note: Even if you are familiar with

investments, you are strongly advised to

work with a qualified financial adviser or

investment planner to design your tailored

investment portfolio. It is also recommended

that you revisit this strategy at least once a

year to make sure that it is still in line with

your long-term retirement objectives and risk

preferences.

Option 3: a custom investment portfolio

A bit about fees and charges

The BPSA Provident Fund makes every effort

to keep the costs of investment as low as

possible for members to ensure that as much

of their money as possible can be invested

towards meeting their retirement needs. That

said, there are a few fees that need to be

paid, one of which is an investment fee that

is levied by Sygnia Asset Management for

their professional management of the Fund’s

investment portfolios.

These investment fees are worked out as

a percentage of the total value of assets

managed by Sygnia on behalf of the Fund

and its members. Each portfolio has its own

sliding scale of fees, which is then applied

to the Fund’s total assets. What this means,

in effect, is that the more money that is

invested by all the Fund’s members, the

lower the average investment fee that each

member will need to pay.

You can find out more about the investment

fees and other costs for each of the portfolios

at www.bpsaprovidentfund.co.za

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A note about switching: While there are many legitimate reasons why you may need to switch your investment portfolio, it is never a good idea to switch too often. Your investments need time to grow effectively, so switching in and out of portfolios, especially if it is being done to try and ‘chase’ better returns, can actually end up losing you money Remember, retirement planning and investing is a long-term strategy. There will be ups and downs in the performance of every portfolio, but over longer time periods, these are usually smoothed out if you leave your invested money to grow.

Switching between portfoliosThe BPSA Provident Fund is committed to making sure that its members enjoy as much choice as possible when it comes to where their retirement money is invested. We understand that your circumstances

and objectives can change over time,

which is why we allow you to switch from

one investment portfolio to another if you

need to.

You can ask to switch between investment

portfolios at any time and the switch

will be made within five working days of

your request. You are allowed one free

investment switch per calendar year. If you

want to switch again in the same calendar

year, you will be charged a switching fee of

R375 (excluding VAT). This cost will be taken

from your Fund Credit.

If you need to switch, you can download the

Switch Request Form the fund website or get

it from your HR Manager.

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Ready to invest? Ask yourself these questions

Choosing an investment portfolio can be

daunting. Here are five questions you can

ask yourself to help you with your decision of

where to put your retirement money:

1. How much do you know about

investments and markets? If you have

a lot of experience in the investment

world then you may feel confident

enough to create your own investment

strategy. If you are not comfortable

with investing, you will need to do a lot

of research and/or speak to a financial

adviser for guidance. The best approach,

however, may be to stick with the default

investment option that has been chose

by the Trustees.

2. How long do you have to invest?

The money you are investing is your

retirement savings. That means you

should be planning on investing it until the

date you retire. Your choice of investment

option will, however, be guided by how

close you are to retirement. If you are still

young, you can probably choose ‘riskier’

high growth investments. But if you are

nearing retirement, it’s better to choose

conservative investments that protect

your capital.

3. What do you plan on doing with your

retirement benefit when you retire (or

leave BPSA)? The two BP LifeStage

Models are designed to suit specific at-

retirement annuities. You should think

about what type of annuity (pension) you

want to buy when you retire, and invest

in the options most appropriate to that

choice. A professional financial adviser

will provide valuable assistance here.

4. How much risk can you tolerate? In

the context of retirement savings, ‘risk’

essentially means negative returns. The

higher the exposure of an investment to

equities, the higher the chance that it

could deliver negative returns in the short

term. However, equities also have the

potential to generate better returns than

other asset classes over time. If you are

willing to take more risk in exchange for

a chance of better returns, you need to

invest accordingly. Your investment risk

profile is also determined by other factors,

like your personal preferences, how

much you have saved for retirement,

your health, how many dependents you

have, and how you want to live after

retirement.

While these questions are useful to guide you in your investment choices, the decision of where to invest your retirement savings is a big one. If you have any doubts or questions about your choice, speak to an accredited financial adviser.

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