The Old Mutual Retirement Monitor 2010 found that 67% of retirement fund members contributed less than 10% of their salary to their retirement fund each month.
‘This is particularly concerning, given that employees need to contribute a minimum of 15% (including the employer contribution) over a period of 40 years if they want to have sufficient savings at retirement to maintain their standard of living,” says Craig Aitchison, managing director Old Mutual Actuaries and Consultants.
Any discussion on retirement industry trends takes place against the backdrop of South Africa’s woeful national savings rate and the shortfall between optimal and actual retirement fund contributions.
Aitchison identifies two main retirement industry trends. The first is the move towards greater employer participation in retirement planning. ‘Employers who are not offering retirement solutions will begin to do so as they seek to compete for and retain scarce skills,” he says.
The second is the continued consolidation in the retirement fund space. ‘There is a marked shift from stand-alone company-specific funds as employers turn to umbrella funds,” says Aitchison.
The move to umbrella solutions is driven by pending retirement reforms, cost efficiencies and the burden of fund governance.
Johann de Wet, head of Glacier Financial Solutions at Sanlam, attributes the move to the increasing burden on trustees. ‘Funds need properly trained trustees and a knowledgeable board,” he says.
‘It’s easier to administer an umbrella fund under one structure versus having multiple stand-alone funds and trying to offer similar benefits in each.”
Migrating small funds to umbrella solutions also creates efficiencies of scale. Industry trends reflect behaviour changes among retirement savers too.
‘Thousands of people have been forced to delay retirement or re-assess their retirement plans as a direct result of the recent recession,” says Seelan Gobalsamy, managing director at Old Mutual Corporate.
Individuals who are not members of retirement funds are making their own retirement provisions, often doing so by contributing to retirement annuities (RAs).
‘RAs come with benefits and drawbacks, like any product on the market,” says Johan de Lange, director at Allan Gray Unit Trust Management Limited. In his opinion the biggest benefit of an RA is that savers cannot access their capital until retirement.
Although viewed as a drawback from a marketing perspective, this forced preservation is one of the product’s best features. ‘
Sanlam has witnessed a renewed interest in both traditional life and new-generation RAs,” says De Wet. This follows huge improvements in cost and return transparency from traditional life annuity providers.
The flexibility of RA solutions appeals to entrepreneurs and employees who change jobs frequently. Savers choose RAs because of contribution flexibility and the ability to manage underlying assets with the help of a financial intermediary.
Kenny Meiring, head broker: sales and marketing at Metropolitan Employee Benefits, urges retirement savers to make the most of the tax concessions vested in RAs. If you’re not contributing to an employee pension fund then you should put 15% of your gross annual salary into an RA.
‘We’re seeing a move towards new-generation retirement annuities with leaner cost structures, including lower commission structures for brokers,” says Meiring.
The RA is protected from creditors, prevents pre-retirement withdrawals and is a sensible, tax-effective way to save. ‘Should you go belly up you’re not going to lose your pension — I don’t think enough people actually appreciate that,” he says.
‘From an estate planning point of view, the RA has become an important vehicle to make use of,” says De Wet. And the move to RAs is not limited to individual savers.
De Lange says: ‘Allan Gray has seen a significant trend of smaller companies cashing in their pension and provident funds and moving to corporate/group retirement annuities.” There is also a major trend towards self management of retirement funds.
Savers prefer vehicles where they can exercise control — and are emboldened by the financial advice from independent advisers, trustees and consultants for the trustees. Some analysts are concerned that too much choice is detrimental to the industry.
‘One of our concerns is the cost involved in giving savers the option to choose from 150 unit trust funds, for example,” says Meiring. Savers tend to go for the default option, meaning the additional cost incurred in providing choice is unwarranted.