The 2010 Old Mutual Retirement Funds Survey reveals a number of flaws in the member communications processes currently employed by pension-fund administrators.
Only 17% of members understand the communications they receive, while a paltry 13% are moved to action by them. In an age where members yearn for interactive face-to-face communication, the vast majority have to settle for an annual letter or benefit statement.
The ineffectiveness of this correspondence is further demonstrated by the fact that 68% of members stick with their funds’ default investment options. Member uncertainty is no doubt fuelling the woeful state of South Africa’s retirement provisioning.
Sanlam Employee Benefit (SEB) latest survey of the local retirement’s- fund industry reveals that 60% of pensioners have insufficient savings levels. The capital available to these savers is insufficient to provide a sustainable level of post-retirement income.
And the poor savings situation is exacerbated by the fact that 50% of these pensioners face increasing financial responsibilities through retirement — due to ongoing debt-servicing obligations, dependants and infl ation-as well as medical aid increases.
“The common assumption is that when you retire, your debt will be paid off and your children will be supporting themselves, leaving you as the only beneficiary of your monthly pension,” says Paul Myeza, CEO of SEB. “Increasingly, pensioners do not only have to take care of family members, but thay are also saddled with debt, which really stretches a pension and highlights the need for retirement planning.”
Industry stakeholders believe education — or rather, the lack of it — is the main reason for member apathy. They say while 25% of employer-based funds allocate increasing budgets to member communication strategies, there’s little evidence to suggest member education levels are improving.
Dawie de Villiers, chief executive of Sanlam Structured Solutions, believes efforts to improve member communication are encouraging. “The use of Internet facilities and face-to-face meetings is particularly effective, in that it provides members with a two-way communication platform to address their issues,” he adds. But there’s a much bigger problem.
The US-based Vanguard Centre for Retirement Research sums it up: “The problem isn’t simply one of education. Even when individuals acknowledge or understand the need to make a behavioural change, inertia and procrastination frequently keep them from taking action.”
Savers know what they should be doing but simply cannot find the heart to do it. “The problem stems from human nature rather than the quality of member communication,” agrees Pieter Koekemoer, head of personal investments at Coronation Fund Managers.
We tend not to worry about the retirement decisions until we get to a point where retirement becomes a reality. And that’s typically when you’ve only got 10 to 15 years to go. For many South Africans this means accelerating retirement funding contributions in their late 40s and through their 50s.
How do you get young people to take retirement seriously? SEB reckons: “Learn from the elderly and avoid their mistakes when planning for retirement!” There is a lack of emotional connection and ownership among members when it comes to retirement planning.
“While they recognise the significance of retirement planning and the need for financial independence after retirement, they simply aren’t doing enough to
achieve this,” says De Villiers. “Savers want the reassurance saving for retirement brings, but are not motivated enough to do more about it or learn how the process works.”
Koekemoer says the best way to tackle this savings inertia is to ensure default choices are “right” for as many retirement fund members as possible. “If you have the right default option then the vast majority of people will end up using it,” he says.
Examples include setting the maximum possible pension fund contribution as default, forcing the saver to deselect this option if they wish to save less. Likewise, preservation can be set as the default for savers moving from one employer to the next.
This notion is backed up in the latest Sanlam Employee Benefi ts Benchmark Survey, which concluded that members actually prefer to be compelled to save. “Most of the active retirement fund members interviewed indicated that they prefer to be forced to save — an overwhelming 87% would not reduce contributions if they had the option to do so.”
Evidence from this survey makes a strong case for legislative intervention in the domestic retirement saving space. “The industry is doing more, but so far its efforts are not paying off — and there’s a growing need for government to step in with mandatory retirement legislation in order to remedy the situation,” says De Villiers.
In their presentation titled Unlocking the Value from your Retirement Fund through Communication, Rob MacMahon of acsis and Julie Rademan of Quoin Wealth unveiled a strategic communication process which they believe will revolutionise the domestic retirement fund space. The approach centres on educating fund members about the decisions they must take and presenting the options at an enabling time.
The first step in the process is to obtain from all stakeholders. The employer, fund consultant and fund administrator must commit to the process. But this comes to nought without buy-in from fund members.
“Members have to realise they are the only one who can take action to remedy their retirement situation. They must understand what their choices are and how they can go about implementing those choices,” says MacMahon.
The second step is to demonstrate tangible benefits to the member, through face-to-face communication, thus enabling them to make decisions in their best long-term interest.
At the KISS (keep it simple, stupid) level, all the individual needs to understand is the three variables in the retirement saving equation. To increase your retirement pot you can increase contributions, increase the return on your investments (by stipulating a higher growth investment option) or save over a longer period.
Failure to do so leaves you with less appetising alternatives — you can cut your post-retirement expenditure — or you can die younger!