Retirement funds in South Africa face the very real prospect of low or even negative returns over the medium term, fuelled by the ongoing European debt crisis. 

According to Rob Spanjaard, investment director at Rezco Asset Management, the World Bank revised its growth estimate for developing economies down to 5.3 percent this year, from 6.1 percent in 2011, whilst cautioning that there could be long period of volatility in the global economy as the Eurozone debt crisis escalates.

"While the rand depreciation is softening the impact of weaker demand for South African exports, the expected lower economic growth rate and a flight to safety by offshore investors could hurt local equity markets.

"As a result, we believe local retirement funds are likely to face another period of very low or negative growth over the next 12 to 24 months.

"This will affect retirement funds’ ability to meet member’s expectations with a corresponding decrease in replacement ratios. As a result, these members are likely to retire with even less security in the future."

He says the European crisis will further exacerbate the position of the "sandwich generation" — those fund members who are caught between subsidising their parents’ retirement and providing for their family’s needs.

"Many of these members will retire with significantly less than they require as they have been unable to contribute at adequate levels whilst at the same time having experienced significantly lower market growth for longer periods of time."

Spanjaard says that while the risks remain high for local retirement funds, there are measures they can put in place to mitigate the impact.

"Firstly, trustees must aim to protect against any potential loss and secondly aim to participate in any market upside. With current market levels being so high, trustees need to have a very clear and measureable risk management strategy in place that will ensure the achievement of their long term goals during this period of volatility and downside risk.

Article continues on page two: your own irrationality is a bigger threat to your wealth than Europe can ever be...