While most of us would choose to fast forward to 2021, this year has taught us many hard lessons, including financial ones. Jaco Prinsloo, Certified Financial Planner at Alexander Forbes, reflects on some of the learnings we should all take with us.
Lesson 1: Debt can be scary
There are few things scarier than losing your income while having debts to pay at the end of the month – a position many South Africans found themselves in. In a situation like this, start by asking for assistance from your creditors and engage with them to work on a repayment plan. Being proactive about this will help you negotiate better payment terms and protect your credit record. Take advantage of the current low interest rates to pay off your debt as quickly as possible to avoid finding yourself in this situation again.
Lesson 2: The importance of an emergency fund
You never know when you might have an emergency or lose your income, and Covid-19 is the perfect example of why everyone needs emergency savings. If you do not already have an emergency fund, start by setting up a monthly debit order that automatically allocates funds to a low cost, easily accessible investment account. You can begin by saving whatever you can afford with the aim to build it up to three to six months’ worth of living expenses.
Lesson 3: Staying the course
The first few months of 2020 reminded us that markets don’t always go up. Seeing your hard earned savings going down with the stock market is very frightening, but don’t be tempted to lock in your losses by withdrawing at the bottom. The markets are on their way to recovery and the rollercoaster ride is an essential reminder to investors not to try time the market and about the importance of sticking to your long term investment goals.
Lesson 4: The importance of living within your means
Living below your means is like a lot like eating healthy – you know will have to give up a few things and that it’s going to be hard. You can find a balance of enjoying life while living below your means by following a financial plan. Set out how much you need for essential expenses like bills and debt repayments, saving for the future and spending on things you enjoy. You might need to give up a few luxuries and save for big-ticket items. Still, all the luxuries in the world can’t make up for the peace of mind financial freedom brings.
Lesson 5: The importance of being covered
While fit and healthy, it’s easy to question the importance of your medical aid and insurance policies. A health crisis is a good reminder of the importance of being able to afford private health care and having cover in place to protect you and your family. If you find you are unable to pay your premiums, or you downgrade your plan, make sure you have sufficient funds available to pay for costs not covered by your medical aid. Your premiums should not be your primary consideration when choosing a medical aid or personal cover, as the benefits always outweigh the costs.
Lesson 6: Have professional support
At the start of 2020 most financial plans did not account for a virus and the economic impact of lockdown. But when your financial plan goes out of the window, get professional help. Building a relationship with a financial adviser is one of the best investments you can make. Having someone to help you navigate the complex and sometimes frightening world of finances can make your journey a lot less bumpy and more enjoyable. Find someone you trust and can rely on for support during challenging times.
Covid-19 caught all of us off guard, and we don’t know when something like this might happen again. To ensure you are ready for whatever life throws at you next, start preparing today by settling your debt, living below your means and saving as much as you can.
by Devan Nathwani, FIA and Investment Strategist at Secor Asset Management
Defined Benefit pension schemes are one of the most significant institutional investors, representing c.£1,700 billion in assets. With investments becoming increasingly more complex, regulatory and reporting requirements increasing and markets generally being volatile, making investment decisions is taking up more of the governance budget. This has been further highlighted in the recent Covid-19 crisis where pension schemes were faced with falling equity markets, collateral calls and new investment opportunities arising from market dislocations. Corporate sponsors saw their pension scheme deficits widen at a time when free cash flow was needed to maintain working capital. There is a vast array of investment or de-risking products that claim to have low governance requirements, however often they can require giving up investment freedom and transparency or have high costs. This is where partnering with a Fiduciary Manager can help.
What is Fiduciary Management?
Fiduciary Management is essentially a form of delegated investment decision making. Fiduciary Managers partner with pension schemes to give advice on scheme investments and are responsible for the implementation of that advice. Fiduciary Management relationships are often highly customised and do not have to be “all or nothing”. A simple Fiduciary Management partnership could involve a Fiduciary Manager managing a fund-of-hedge-fund portfolio. A more comprehensive partnership could involve a Fiduciary Manager using their investment expertise to make investment decisions on the entire scheme portfolio. In practice, these partnerships can take many different forms and the best relationships are often highly customised, be it in the services received, the portion of the assets covered or the decisions that are delegated.
Why Fiduciary Management?
Every pension scheme is different and in practice will choose to partner with a Fiduciary Manager for different reasons. Some common reasons for partnering with a Fiduciary Manager are:
Independent investment expertise
Over the last 10 years pension scheme investments have become increasingly more complex, with alternative asset classes becoming a core component of the strategic portfolio. Asset classes such as Private Equity, Private Credit and Property require in-depth knowledge of the different strategies deployed within them and often require portfolio management expertise to deal with capital calls and distributions and the sizing of commitments. Independence can be crucial here as these asset classes often carry high investment fees and require careful investment due diligence. A Fiduciary Manager typically has deep investment experience in a broad set of asset classes that a pension scheme can in-source without the cost of building an in-house team. Independence can be very important as a Fiduciary Manager that has no association with the underlying managers that a pension scheme invests with, can make investment decisions with minimal conflicts of interest.
Precision and speed
As highlighted by the market impact following the Covid-19 pandemic, it is important for pension schemes to be able to implement their investment decisions with speed and precision. Markets move every single day and investment opportunities can often arise and pass more quickly than a typical pension scheme governance structure can tolerate. Risk management is one of the most important objectives for a pension scheme, with unrewarded risks needing careful management and rewarded risks needing to be sized appropriately. Fiduciary Managers monitor their client portfolios daily and can act quickly to take advantage of investment opportunities or rebalance the portfolio as markets move.
As regulatory requirements have increased, pension schemes are increasingly being asked to monitor their investment decisions with more scrutiny. Regulation requires them to consider Environmental, Social and Governance (ESG) factors in their investment decisions and understand the performance of their investments in detail, including the impact of explicit and implicit transaction costs. In addition, as funding levels improve, pension schemes and their sponsors are looking for tighter control and greater transparency over the scheme’s risks. This is particularly important as schemes approach their desired “End Game”. Good Fiduciary Managers typically have proprietary tools and systems that facilitate better performance and risk measurement. As regulations form and evolve, Fiduciary Managers adapt their investment decision making processes to account for them making compliance much easier.
Typically pension schemes and their sponsors have limited internal resources with limited time to spend on both investment and non-investment related matters. Most companies do not have dedicated pensions treasury teams so it can be difficult to devote the sufficient time that is required to both monitoring investment performance and making investment decisions. Where new asset classes are added to a pension scheme’s portfolio, additional training may be required which can take a considerable amount of time, particularly for more complex asset classes. Partnering with a Fiduciary Manager can supplement any existing governance structure by re-focusing pension scheme resources on more strategic matters.
Pension schemes typically receive advice from investment consultants who do a good job of advising on strategic matters but are ultimately not accountable for the performance and the outcome of that advice. Pension scheme representatives are increasingly looking for their advisors to be accountable for their advice and the performance relative to the liabilities. Fiduciary Management solutions typically focus on liability relative scheme performance and are governed by the GIPS Fiduciary Management Performance Standard, to ensure a consistency in performance measurement.
Value for money
Fiduciary Management relationships are often all-encompassing and typically cover all investment related matters for the pension scheme. Through economies of scale, Fiduciary Managers negotiate more favourable asset management fees on behalf of pension schemes and are able to get schemes of all sizes access to investment opportunities that would historically only be available to larger schemes. The combination of investment expertise and accountability under a single Fiduciary Management solution, is expected to deliver better funding and performance outcomes which ultimately offers better value for money.
Fiduciary Management as an investment solution is arguably more relevant today than historically. The recent crisis has highlighted the need for an investment partner who can help manage the downside risks associated with investing in equities, manage the collateral behind important hedges and take advantage of market dislocations. Many corporate sponsors will have seen their pensions contributions eroded and balance sheet deficits widened during the Covid-19 market crisis and a Fiduciary Management partner could have helped better navigate the volatility.
As corporate sponsors begin to consider the “End Game” for their DB pension scheme, they are increasingly faced with the dilemma of entering low-governance investment solutions that may be poorly constructed or paying an insurance premium to “Buy-out” the scheme.
Solutions such as Cashflow Driven Investing (CDI) tend to overemphasise portfolio construction to be based on uncertain cashflow profiles, and excessively exposing the pension scheme to risky credit allocations, which in a post Covid-19 world could expose pension schemes to adverse funding outcomes.
For corporates who prefer to avoid a large cash lumpsum payment for insurance-based buy-outs, a Fiduciary Manager can offer an alternative solution to reaching the required funding level for such a transaction to take place. By slowly growing the asset base while carefully managing risks, pension schemes can become buy-out ready allowing their sponsors to reinvest free cashflow in existing or new business lines.
Partnering with a Fiduciary Manager today could give pension schemes the tools to better manage the next crisis and offer more flexibility in reaching the desired End Game.
 The DB Landscape – Defined Benefit Pensions 2019 – The Pensions Regulator dated January 2019
TOUCH-FREE AUTHENTICATION FOR ALL: WHY WE NEED A SAFER PAYMENT METHOD IN THE ‘NEW NORMAL’
David Orme, SVP, Sales & Marketing, IDEX Biometrics ASA
Ever since March, when the World Health Organization encouraged people to not use cash, coronavirus has made touch-free shopping a necessity for all consumers. However, as economies across the world begin to reopen, we are seeing in-person shopping and payment via touch-pads return. So, with payments beginning to return to ‘normal’, the global payments industry must now consider an important question: how can we protect consumers from the pandemic and potential future health crisis’ during the transaction process?
During the pandemic, touch-free payments began to gain international traction across the world, changing behaviour during the payment process. While previously, consumers were happy to key in a PIN, or even provide a signature for a purchase, they are now familiar with more convenient and safer touch-free methods, and they’re not likely to let them go.
In Europe, high street chains have rapidly shifted to contactless payments, often refusing to accept cash. Meanwhile in the USA, levels of contactless payments have rocketed since the pandemic, after a slow initial adoption of the service – US banks only adopted contactless cards in 2019 compared to 2007 in the UK. According to Visa, overall contactless usage in the USA has grown 150% year-on-year as of May 2020.
Even mega-retailer, Walmart, has recently introduced contactless options for in-store shopping and delivery to protect its customers during the pandemic – showing there is growing demand for a touch-free and convenient way to pay across the world. This has raised awareness of touch-free payments among consumers looking to reduce contact-based interactions and time spent at the checkout during the pandemic.
Mobile payments are growing
Mobile payments are growing, again showing the desire for touch-free authentication among consumers. According to Forbes, the US mobile payment market – currently only sixth in the world – has increased 41% and is worth more than $98 billion.
To respond to the growth of touch-free payments among small vendors, PayPal has launched a new QR code-based payment app that allows market stall holders or businesses without a PoS machine to accept payment through a code. This means even the smallest of merchants, from small stores and farmer’s markets to craft sales, can now go cash-free and use touch-free payments for everything.
Meanwhile, China has long been using QR code-based apps, such as WeChat Pay from tech giant TenCent and AliPay from Alibaba. The apps are so widely used that street vendors display QR codes for payments and together the two fintech giants control about 90% of China’s digital payments market.
But card is still king
At the same time, payment cards are still consumers preferred way to pay. Of course, we only need to look to Apple and Google, who recently have launched physical payment cards despite running mobile payment apps for further proof that payment cards are far from dead.
So why aren’t cards on their way out, given the growth of mobile payments?
We know that consumers still look to payment cards for security and a sense of familiarity while shopping. According to IDEX Biometrics’ research carried out in the UK, only 3% of consumers choose to use mobile payments, while nearly two-thirds (65%) state that carrying their debit card provides a sense of security. And when it comes to touch-free payments, only biometric payment cards can provide the most secure level of validation with an easy digital experience for shoppers.
Despite the popularity of WeChat as a payment app, China’s biggest card provider China UnionPay has recognised that its customers aren’t ready to give up on physical payment cards either. China UnionPay has recently certified the first biometric fingerprint card technology in the country as they look to the use of biometric technology in cards to provide an extra layer of security, with added convenience and hygiene during a payment transaction.
Secure touch-free card payments
Biometric fingerprint payment cards provide end-to-end encryption – securing the user’s card and data. A fingerprint biometric card allows the user to authenticate their ID by touching their finger to the card’s sensor while holding it over the contactless card machine. Therefore the shopper only has to hold their own card over the PoS system and the entire transaction process is free of public PIN pads or checkout counters – making it no different to how consumers currently use contactless payments cards. This touch-free payment technology provides the consumer with the convenience of contactless or a mobile payment but with far greater security, as the card is personally tied to the owner.
Biometric identification is already firmly incorporated into our everyday lives. Thanks to unlocking our phones and authenticating payment apps, we are increasingly using our fingerprint to verify our identity. Now that consumers are familiar with the technology, biometric identification in payment cards will become essential to help consumers navigate the shopping and transaction process safely, speedily and securely.
As our economy gradually reopens, financial services providers must protect consumers during the transaction process. In stores, on transport systems – even in stadiums – a fingerprint biometric payment card will provide touch-free payment authentication for all.
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