While more young people are becoming increasingly concerned about making provision for their retirement, savings numbers show that they are doing very little about it.
Old Mutual commissioned a retirement fund survey using a sample of 60 local retirement funds comprising a total of 92 000 active members and 33 000 pensioners.
According to independent actuary Rob Rusconi (well known for blowing the whistle on pension fund costs), who is advising Old Mutual on retirement fund reform, the most interesting finding was that a greater number of young professionals are concerned that their pension benefits will be insufficient. Rusconi says it is encouraging that people are starting to think about retirement provision at a younger age.
According to John Kotze, manager of Old Mutual Actuaries and Consultants, the younger a person starts saving for retirement the better. For example, if one saves for 40 years 15% of one’s annual salary needs to be put away for retirement, if saving starts 10 years later, this jumps to 22%.
While members are talking about retirement savings at an earlier age, the savings ratio has actually been declining. A possible reason for this is that the majority of members felt that their funds provided little communication on retirement planning, although 93% of funds surveyed believed their communication levels were effective.
Survey results show that five years before retirement only 30% of funds provided retirement counselling and even one year prior to retirement only 33% of funds offered counselling.
Kotze said that the survey also showed that people who were three years from retirement did not feel competent to make decisions about their retirement.
Other reasons that came through in the survey was the negative impact that the findings by the Pension Funds Adjudicator and the Rusconi report around fees and bad practices had on the retirement industry. The survey also found that members did not believe brokers to be impartial and that most members had high levels of debt and little spare cash.
With the Treasury having issued its first White Paper on retirement fund reform, Old Mutual has made some recommendations around increasing retirement provision. It believes that some form of compulsion needs to be considered.
Many countries have forced savings for retirement. This ties in with the government’s proposed National Savings Fund, but Old Mutual is concerned about labour’s call for access to these funds for life crisis.
Rusconi is in favour of some kind of co-payment system where the government would add a portion to the retirement fund rather than providing tax relief. In the case of a life crisis, the member could then only access his or her portion of the savings and the government’s savings portion would be held over for retirement needs. Old Mutual also supports the government’s indication that it will move away from provident fund schemes, where members can withdraw the full lump sum on retirement, to the pension fund rules where two-thirds have to be used to buy an annuity income on retirement.
Preservation of retirement money when changing jobs also needs to be enforced. However, this needs to be met with easy movement between funds as well as more flexible and portable individual retirement funds (retirement annuities).
Another surprising figure raised in the survey was that the majority of members assumed that when they purchased an annuity on retirement it would be inflation linked. In other words, they assumed that their monthly pension would increase each year with inflation. The reality is that on retirement a member can choose whether they want an annuity that remains static or one linked to inflation. Retired members also assumed that their spouses would be provided for after their death, yet only 43% of funds surveyed offered spouse pensions when the member died.