Investing heavily in equities (75%) for strong returns over time
Gradually moves to bonds and cash as retirement nears
Target 66%-81% of pre-retirement income with smart income options
Structured pension funds such as the Botswana Public Officers Pension Fund (BPOPF) offer a systematic approach to investment model which investors can draw valuable lessons from.
The Accumulation Phase: Building Wealth Over Time
According to a presentation by Kgomotso Beleme, the Principal Investment Officer at Alexforbes Botswana, the accumulation phase is the period during which individuals actively earn and invest. In a structured pension system, this phase typically begins in early adulthood and lasts until retirement.
The BPOPF model assumes that an individual starts working around age 25 and remains invested for approximately 35 years before retiring at 60. It is important to note that employment can start at a later age due to circumstances that include high unemployment rate like in Botswana.
Accumulation Subphases:
Growth phase:
During this period, pension funds allocate a significant portion of investments to growth-oriented assets, primarily equities (stocks), which historically offer higher returns over the long term despite short-term volatility. In the case of BPOPF, the growth phase portfolio is structured as follows:
Equities (75%) – High-growth potential but subject to market fluctuations.
Property (7%) – Provides both income and capital appreciation.
Exchange-Traded Funds (ETFs) (4%) – Diversification with passive investment strategies.
Bonds (15%) – Moderate risk with stable income generation.
Cash (1%) – Low risk but limited returns.
This approach allows pension funds to maximise returns during an investor’s working years, taking advantage of market cycles with the expectation that, over time, returns will outweigh short-term downturns.
According to Beleme, the primary objective of the growth portfolio is to achieve a return of CPI + 4.9%, ensuring that investment growth surpasses inflation and maintains purchasing power.
“It is important to tie to inflation to be able to protect purchasing power and add more than inflation,” Beleme said during a presentation.
De-Risking: A Shift Toward Stability
As retirement approaches, pension funds gradually reduce exposure to high-risk assets and increase allocations to more stable investments.
Financial experts often recommend this shift to prevent significant losses in the years leading up to retirement, when there is less time to recover from market downturns.
Under BPOPF’s model, an individual planning to retire at 45 (early retirement) would start adjusting their portfolio at age 40, reducing equities in favor of bonds and cash. Someone retiring at 60 would begin this at around 55.
The portfolio at this stage would be structured as follows:
At this point, the return expectation decreases to CPI + 2%, reflecting a more conservative investment approach.
By the time they transition into a pre-retirement portfolio at 42, the asset allocation becomes:
The pre-retirement portfolio is designed to at least match inflation, ensuring that capital is preserved and purchasing power remains stable.
This strategy ensures that as investors near retirement, their portfolio is less vulnerable to sudden market shocks, prioritising capital preservation over aggressive growth.
The Consumption Phase: Turning Investments into Income
Upon retirement, the focus shifts from accumulation to drawing income from investments. Retirees have multiple options to structure their income, including:
Non-Profit Annuities – Provides a fixed income with lower risk.
In-Fund Profit Annuities – Investments continue to grow with controlled withdrawals.
Purchased Annuities from Insurers – A structured income stream managed by an external provider.
Net Replacement Ratio
The net replacement ratio is how much of your paycheck you’ll still get after you retire, compared to what you earned while working—after taxes. It helps show if your retirement income will be enough to maintain your lifestyle.
The BPOPF model targets a net replacement ratio of 66% to 81%, meaning that upon retirement, individuals should aim to replace at least two-thirds of their pre-retirement income. For example, if a retiree previously earned P10,000 per month, they should aim for a retirement income between P6,600 and P8,100 per month.
Additionally, retirees in Botswana can withdraw up to 50% of their pension as a lump sum, requiring careful planning to ensure financial security throughout retirement. Industry experts cautioned that while a lump sum offers immediate liquidity, it must be managed wisely to prevent depletion.
Botswana Insurance Holding Limited (BIHL) CEO Catherine Lesetedi previously cautioned about the rise in encashment, worried that pensioners lack the skill to manage their funds.
“What we have seen is that seven out of 10 people now opt to cash out their benefits instead of purchasing annuities and we believe this will cause further liquidity challenges for the insurance industry.”
Debswana Pension Fund reported that in December 2022, 18 out of 21 members retiring in that month commuted the full 50% of their pensions.
Key Takeaways
While not everyone has access to a structured pension fund, individual investors can still apply similar principles to their financial planning:
Long-Term Growth Mindset – Younger investors can afford to take risks, investing in equities to maximise long-term returns.
Gradual Risk Reduction – As one approaches retirement, it is prudent to shift towards more stable investments such as bonds and cash.
Inflation Protection – Ensuring that investment returns outpace inflation is crucial for maintaining purchasing power in retirement.
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