Saving for retirement is not for sissies. It requires dedication, discipline and restraint to ensure you collect enough during your working life to ensure a “living wage” throughout your golden years. At the dawn of the 21st Century the financial services consumer is bombarded with advice on how to achieve this difficult goal. We are told how much to put away (15% of our gross salary per month), we know that we should take an active interest in choosing our retirement fund option and we understand that we should preserve our capital at all costs. But despite this knowledge, we fail dismally at each hurdle.
“The reason we save is to provide for one of two things: expenses in excess of our income, such as a high-value once-off purchase, or for a period when we don’t earn any income and require savings to fund our living costs,” says Andrew Davison, acsis Head of Institutional Asset Consulting. These periods without income include unexpected events (such as retrenchment) or planned events (retirement). People struggle to save for retirement because instant gratification trumps putting away towards financial security at an uncertain future date.
One of the major obstacles to efficient retirement saving is that South Africa’s pension fund regulations allow members to withdraw their cash benefits when they leave a pension fund due to a change of employment or divorce. Shocking statistics from the Benchmark Survey confirms that 71% of fund members fail to preserve when job hopping, despite 85% of these members admitting that they know they could be negatively impacting their retirement plan. Danie van Zyl, head of Guaranteed Investments at Sanlam Structured Solutions notes that when a member takes his fund value in cash on withdrawal, it decreases the time the member has to build up the necessary retirement nest egg. But there’s nothing stopping savers from cashing in.
“If you allow members to take cash on withdrawal you should not be surprised that they do so,” observes Kobus Hanekom, head of General Consulting at Simeka Consultants and Actuaries. “Likewise, if you make it possible for members to lay their hands on their benefits should they get divorced, you should not be surprised when people end their marriages to get their hands on the cash.”
Calls for government to put an end to these withdrawal benefits have met with resistance. Because of the high unemployment rate and general indebtedness of consumers, denying the withdrawal benefit could cause unnecessary hardship. “What we recommend is for funds to introduce a default preservation arrangement,” says Hanekom. Employees’ funds would be automatically swept into a preservation fund unless a request to withdraw the benefit is received. “In this way members are offered an alternative to taking their money in cash, while retaining the right to make a withdrawal at a later stage if circumstances dictate,” he says.
Perhaps today’s retirement fund members have too much choice. “Members can now make their own investment choices, determine their own level of life cover, decide on their contribution rate and purchase an annuity of their choice upon retirement,” says Van Zyl. While some members thrive on this freedom, many find the range of options bewildering. Retirement fund members tend to be apathetic. They lack an understanding of their retirement funding and show little inclination to learn more about it. To make matters worse, they suffer from inertia, a fear of decision making and tend to focus on the short-term. Their decisions often destroy, rather than create, value.
For this reason, the use of default options in retirement savings mechanisms is paramount. “For most members, selecting an appropriate portfolio or range of portfolios is a daunting task and having a default option will assist them with this very challenging yet vital decision,” says Frank Richards, head of Asset Consulting at Momentum Employee Benefits. “The default strategy should be the one that caters for the majority of members’ needs,” adds Davison. He believes that this option should be the long-term growth-oriented strategy — a high-risk rather than medium-risk option. “In this scenario, more attention can then be given to encouraging members who are approaching retirement to make a choice and not be defaulted,” he says. By creating a more aggressive default, members with longer time to retirement are taken care of and the fund managers or trustees can spend more time “guiding” older members into the correct active choices.
There is no legislation to force local savers to put away a minimum towards retirement. And aside from members of employer-sponsored funds, nobody is compelled to save. Without regulatory intervention it will be up to current industry stakeholders to improve things. “The key is to provide members with an understanding of the impact of their decisions on their income in retirement – once they understand the impact of their choices and decisions in relation to contribution levels, investment strategy, preservation and retirement date, they are more likely to make decisions that improve their retirement income,” says Davison.
Employee benefit companies are already taking steps to address the problem. “The Asset Consulting division within Momentum Employee Benefits Investments introduced an approach whereby they provide member-level investment consulting,” says Richards. “The aim is to establish whether the individual members will be able to retire comfortably given their unique circumstances and the portfolios they invest in.”
To achieve this they follow Davison’s recipe; they use member-specific data to calculate the expected replacement ratio for each member at retirement. Members can save, measure their results, make adjustments and measure again — and repeat this cycle until retirement.