By: Hugh Hacking - Executive Head Structured Investments and Annuities, Momentum Corporate

The South African Reserve Bank's higher-for-longer interest rate outlook and revised inflation expectations have sharpened a critical challenge for retirement savers and funds: generating real returns is becoming more difficult, annuity pricing and liability assumptions may need recalibration, and portfolios designed for a low-inflation environment could struggle to deliver the outcomes members expect. For years, trustee agendas have been dominated by corporate governance, regulatory compliance, and investment performance. But as the macroeconomic landscape shifts, it’s becoming clear that parts of the industry may have anchored their long-term strategies to an economic reality that no longer exists.

The danger of anchoring

The biggest flaw in modern retirement planning is not a failure to calculate inflation, but a failure to anticipate the risk of the inflation rate changing. Human nature means we tend to anchor ourselves to current conditions. When inflation is high, we assume it will stay high. When it falls, we plan as though low inflation is a permanent fixture.

South Africa's own monetary history illustrates the point. There was a time when the idea of 3% inflation here would have seemed laughable. Yet once the market adapted to inflation targeting, a kind of collective amnesia set in. Financial models assumed that low inflation was the new normal, ignoring the reality that structural shifts, policy changes, and global shocks can push inflation back into double digits within a decade.

For short-term savings, that sort of anchoring is a minor inconvenience. For retirement funds, it’s a structural fault line.

The 70-year horizon

Retirement planning is unique because of its exceptionally long-time horizon. When you combine the years spent accumulating retirement savings with the years spent drawing an income in retirement, the planning horizon can easily stretch 60, 70 or even 80 years.

To put that into perspective, 60 years ago the world had yet to experience the oil crisis, the internet age, or the dot-com boom. If economies can change so dramatically over six decades, retirement strategies must be resilient to very different inflation environments.

The danger is that prolonged periods of low inflation can reshape how funds and members perceive risk. Over time, the focus shifts from protecting purchasing power to avoiding short-term market volatility. The result is often overly conservative portfolios, concentrated in cash or fixed income, that may feel safe today but leave members vulnerable if inflation rises and remains elevated.

The opposite trap is equally dangerous: when inflation spikes, the panic response can push funds into excessive market risk, right before a correction.

The retirement minefield: choosing an annuity in a shifting landscape

The tension between changing inflation and rigid financial planning is most apparent at the point of retirement, when members must commit their life savings to an income-generating product.

In a low-inflation environment, retirees often choose level annuities or fixed-escalation annuities, typically set at 5% annual increases. A 5% escalation feels generous when inflation is running at 3%, delivering genuine growth in purchasing power. But if inflation shifts to 8% or 10% for a sustained period, that fixed income stream is eroded year after year.

Complicating matters further, inflation does not hit all retirees equally. CPI measures an average basket of goods, but older South Africans face a very different personal inflation reality. As people age, spending shifts from transport and lifestyle towards healthcare and specialised housing, sectors where costs have historically risen faster than broader CPI. A retirement model that ignores this shifting personal inflation baseline over a 30-year post-retirement period is not building genuine financial resilience.

Navigating the real return trade-off

Addressing these structural risks requires the industry to rethink its approach across both phases of retirement: the accumulation phase and at retirement.

During the accumulation phase, maintaining exposure to growth assets such as equities remains essential to generating long-term real returns. While traditional life-stage models reduce equity exposure as members approach retirement to protect against market downturns, this transition must be carefully managed. De-risking too aggressively can undermine a portfolio's ability to outpace inflation in the years when retirement savings are at their peak. Smooth bonus portfolios offer a potential middle ground, combining downside protection with continued exposure to growth assets.

For retirees selecting life annuities at retirement, the industry must look beyond fixed-escalation products. CPI-linked annuities provide an explicit inflation hedge but tend to be capital-intensive and less accessible for those with smaller accumulated balances. With-profit annuities are an underused alternative - by linking pension increases to an equity-exposed investment portfolio, they offer a framework that historical evidence suggests tracks changing inflation regimes more closely over time.

For those selecting living annuities, managing the drawdown rate against actual real returns is critical. A retiree drawing down more than their portfolio earns in real terms is actively liquidating their capital base, shortening their financial runway with every passing year.

 How the industry can bridge the gap by enhancing member outcomes

While the rise of commercial umbrella funds has significantly professionalised the retirement industry, sharpening the focus on institutional investment performance and real returns, a meaningful opportunity remains to better support individual member decision-making. Members, often understandably influenced by short-term market volatility, sometimes shift retirement savings into cash-based portfolios, missing out on long-term growth.

The industry has a clear path forward, by evolving how we translate complex investment trade-offs into accessible, actionable guidance, we can empower members to make more informed choices. Moving toward more personalised member engagement rather than treating the membership as a single, homogeneous group will be key to ensuring that every individual’s long-term strategy is better aligned with their unique risk profile and retirement goals.

The strategic imperative

Economic conditions change far more quickly than retirement strategies. That reality should serve as a reminder that long-term retirement outcomes cannot be built on a single set of assumptions about inflation, interest rates, or market conditions.

Trustees and asset managers need to stop managing the average. They should continuously test the resilience of their default portfolios across multiple economic scenarios and ensure that inflation protection is deliberately embedded throughout the member journey.

Ultimately, the goal is not to predict the next inflation cycle, but to build retirement solutions capable of preserving purchasing power regardless of what economic environment emerges next.