With Smoothing, there’s no “bad” time to retire

The global financial system was in the midst of a subprime mortgage meltdown, and no superhero could save it. But has a superhero emerged since then that can help in times like this?

Now meet Jane and Joe. Both retired in June 2008, but while Joe was invested in a typical balanced fund, Jane chose a Smooth Bonus portfolio. When the market crashed, Joe’s portfolio took a massive knock. Thanks to the capital protection built into Jane’s Smooth Bonus portfolio, she cruised into retirement with confidence.

Neither Joe nor Jane got to choose when they retired, but they could choose how bumpy the ride was.

“Markets can crash, and they do. If it wasn’t the global financial crisis in June 2008, it was the Covid-19 pandemic in March 2020, or the dot-com bubble in 2001. Typically, these crashes occur every seven years on average.”

- John Anderson, Managing Executive - Sanlam Corporate Investments.

Anderson says that during the 2008 financial crisis, the average balanced fund experienced a severe drawdown of about 25%.

“For people retiring in that period, it would have been a challenge because their assets were reduced by 25%, depending on where they invested. If you were forced to retire in that period, your lump sum would have been lower – and if you were going into a living annuity, you were drawing down in the market lows and locking in those losses.”

- John Anderson, Managing Executive - Sanlam Corporate Investments.

However, your experience would have been quite different if you were invested in a smooth bonus fund. Smooth Bonus funds combine investment with insurance to provide long-term investment returns while smoothing out the market’s natural short-term volatility.

“Smoothing places your investment on an insurance balance sheet, where the returns can be pooled and smoothed over time.  In addition, various protections can be put in place to protect during specific times, such as the period before retirement when you need the protection most”

- John Anderson, Managing Executive - Sanlam Corporate Investments.

“The insurer smooths the return so that the long-term returns are equivalent to what you would get with those underlying assets, but without the short-term volatility. In addition to the smoothing, you can also add guarantees that your returns won't be lower than a certain amount. Those guarantees are typically set at 50%, 80% or 100% of the portfolio.”

- John Anderson, Managing Executive - Sanlam Corporate Investments.

During the 2008 financial crisis – and the more recent 2020 Covid-related crash – Sanlam’s Smoothed Bonus portfolios smoothed the returns, protecting the Jane in our story from the catastrophic losses that Joe experienced.

But Joe’s problems were only starting. “Going into retirement in 2008 or 2020 with a significant reduction, if you’d chosen a living annuity, you would start drawing down and crystallising your losses,” says Anderson. “And unfortunately, those losses are then locked in, which would affect the longevity of your living annuity. If you were invested in a smooth bonus portfolio before and after retirement, you wouldn’t have that problem.”

The benefits of smoothing extend beyond the protection it offers against market volatility. It also adds value in that crucial transition into retirement and after retirement.

“A typical life-stage portfolio invests in high-growth assets when fund members are young, and when they get closer to retirement, the asset allocation becomes more conservative,”

- John Anderson, Managing Executive - Sanlam Corporate Investments.

“But if you use smoothing in the 10 years before retirement, when your assets are at their greatest and compound interest is having the biggest impact, you can afford to have a higher allocation of growth-oriented assets because the smoothing solution will manage the volatility. In fact, we've compared typical life-stage portfolios against a strategy that makes use of smooth bonus in the period before retirement, we have found that the one using smooth bonus structures outperform by between 1% and 4% per annum whilst providing protection and peace of mind when you need it most.”

- John Anderson, Managing Executive - Sanlam Corporate Investments.

This outperformance and peace of mind is significant and improves member outcomes.

According to Anderson “analysis done by our team shows that for pensioners in retirement making use of living annuities, by investing in smooth bonus portfolios you can achieve higher growth and reduced volatility, overall adding 1% per annum compared to a traditional approach to managing living annuities”.

There is therefore a material uplift before and after retirement by making use of smoothing solutions when targeted to the right areas of your life journey.

At the same time, the pooling structure enables Smooth Bonus funds to negotiate better fees and better arrangements with the various underlying investment managers. It also allows the funds to invest in illiquid and alternative assets to a greater extent than other typical investment strategies do.

“With the number of stocks on the JSE reducing, the local investment universe is becoming more and more limited and concentrated.”

- John Anderson, Managing Executive - Sanlam Corporate Investments.

“As a result, you need a credible unlisted private market allocation to access a broader range of investments – and you can do more of that, making use of a smooth bonus fund. The alternative assets offer a better diversified return, as well as a greater ability to have a real impact on the day-to-day economy.”

- John Anderson, Managing Executive - Sanlam Corporate Investments.

Anderson emphasises that these benefits are a feature of the new generation of Smooth Bonus portfolios.  “Smooth Bonus funds are a lot more sophisticated than they were 40 years ago – and the results for people who retired in 2008, 2020, or even 2025 are clear to see. Given the current levels of markets (which have run strongly), the elevated risks of correction and volatility, now is a good time for funds and individuals to be re-assessing their strategies and making use of these solutions to improve outcomes,” he says. 

New generation smooth bonus portfolios have therefore emerged as the superhero to help both Joe and Jane during times of extreme volatility and financial crisis, ensuring superior long-term outcomes whilst providing peace of mind when it is needed most.

Choose Sanlam Corporate Investments.