South Africa has a dismal savings track record. Once we tote up our bank deposits, additional capital repayments on bond accounts and a variety of short-and long-term investments we manage a paltry 1.5% of GDP in annual household savings. It comes as no surprise that the National Treasury is thinking up ways to bolster the country’s private savings landscape.
In recent years its focus has been on retirement provisioning with the unveiling of an ambitious white paper to document a proposed National Social Security System (NSSS). The proposal has been widely debated but its implementation was undoubtedly delayed due to the global economic recession of 2008/9 and the ongoing post-recession ‘freeze’.
It is clear Treasury expects these reforms to lift the private savings rate considerably. Another quick, albeit unpopular, fix would be for the finance minister to introduce mandatory preservation for pension fund members.
Under existing retirement legislation, savers prefer drawing their accumulated retirement funding when changing jobs. Whether or not the country’s citizens are catered for in retirement, there remains a need for short-term savings.
“You need to put away cash for life’s emergencies and unexpected expenses such as a family member falling ill, a family death or having to replace an essential household item at short notice,” says Prem Govender, chairperson of the South African Savings Institute (Sasi).
A stronger focus on short-term savings will hopefully boost the country’s private savings rate nearer finance minister Pravin Gordhan’s self-imposed 6% target. If financial institutions instil the ‘save for a rainy day’ culture among the poor, informally employed and low-income earners, we can look forward to a knock-on effect on longer-term retirement savings too.
Where should these savers invest their short-term cash?
A traditional bank savings account offers dismal interest rates, often as low as 0.75%, and attracts disproportionate transaction charges for smaller cash values. But there are a number of alternatives savers can choose from. Government leads the way in providing sensible savings alternatives for the poor.
The Post Bank offers a range of traditional and term savings accounts backed by its impressive national branch network. Its Smart Saver product, which requires a minimum R50 deposit, already boasts more than 1.4 million account holders. And National Treasury — piggybacking on the Post Office’s infrastructure — has long dominated the short-term savings space with its innovative RSA Retail Bond offering.
This product pays market-leading interest rates on two-, three- and five-year ‘deposits’. Savers can purchase these bonds in units of R1 000 directly from National Treasury or at any Post Office or Pick ‘n Pay store. Returns are extremely tempting with the two-year fixed interest product currently paying 7.5% interest per annum. Savers have flocked to the product and have invested an impressive R9.3-billion since 2004.
The RSA Retail Bond proved so popular that Treasury recently announced plans to extend the product offering to smaller investors through an innovative Top-Up Retail Savings Bond, which requires a minimum investment of only R500 and allows investors to add to this investment with amounts of R100 or more.
“Like all our Retail Bonds, they will carry no fees or commission costs at all,” says Gordhan. “We hope to see more and more South Africans, and especially the youth, take advantage of the competitive rates and the security that the bonds provide.”
Security of investment is a major concern for local savers following a number of widely-publicised financial scandals in recent years. The assumption is that bank deposits, fixed income unit trusts and money market accounts are risk-free. “Not so,” says Govender.
One of the risks is that your investment fails to keep pace with inflation. Fixed income unit trusts are typically invested in a selection of bonds, cash and listed property, which can perform poorly over short periods. This risk concern dissipates over the longer-term as even conservative asset classes offer inflation-plus returns.
A recent study by Marriott Asset Management confirms that real returns (the amount your savings grow by after stripping out the effect of inflation) on cash and bonds top 2% per annum going back four decades. Are there sensible unit trust options for low-income investors?
The Association of Savings and Investments South Africa (Asisa) confirms there were 934 local unit trusts with approximately R961-billion assets under management as of 31 March 2011. Most of these products require minimum investments of R500 or more, but there are solutions for those with as little as R100 per month to invest.
Absa Investments is among the many institutions using the July National Savings month to encourage short-term savings activity. The investment arm of the country’s largest retail bank challenged consumers to do their bit to lift the household savings rate.
“It’s never been easier to save,” says Sylvester Kgatla, Head of Product at Absa Investments. “These days a client can build up a nest egg in a safe, well-regulated unit trust for as little as R100 per month.” He pointed out that a R1 000 lump sum invested today and topped up with monthly instalments of R100 would be worth in the region of R9 500 five years from now (assuming 9% annual return from the Johannesburg Stock Exchange).
What should savers do if they have larger amounts of cash to invest over periods of between six and nine months? Saving options include a conventional bank savings account, a 32-day notice deposit, money market investments or even putting it into your mortgage access bond.
“Although you don’t earn any interest by putting extra cash into your bond, you end up saving the interest that you would have been charged on some of the capital,” notes Govender, before warning savers to make sure their bond facility allows them to draw down on these extra payments at a future date.
“The original access bond was a facility noted against your bond,” says Peter Dempsey, deputy CEO of Asisa. “Two decades ago an additional payment into your mortgage bond was a brilliant form of saving, because you had to physically go to the branch and request your excess funds.”
It still makes sense to make additional payments to your bond because it reduces both the term and the capital outstanding, but it has become too easy to access these funds and the temptation exists to use ‘saved’ amounts to finance consumption spending or short-term asset accumulation.
As your investment time horizon expands from the short- to medium- term a world of products open up. There are hundreds of fixed income and money market unit trusts, for example. And if you plan to invest for two years or longer you can begin looking at asset allocation and equity unit trusts too.
Are unit trusts risky? Candice Paine, Sanlam Investment Management head of retail says savers must understand that no investment is entirely risk-free. One of the biggest threats to all categories of short-term savers is inflation.
“Rising inflation is currently a key risk for bond investors because interest rates are likely to be hiked as a result,” she says. The inflation/interest rate link is well documented, but for completeness we should remind readers that the South African Reserve Bank has an inflation targeting policy, with interest rates as its major inflation-busting tool.
The bank wants to keep the inflation rate within a 3% to 6% band. The nearer inflation gets to the upper limit — and it is climbing steadily due to rising food (especially meat, which makes up a large portion of the inflation basket) and oil (now entrenched above $100 a barrel) prices — the sooner the bank will have to hike interest rates.
However, with interest rates at an all-time low and inflation creeping upwards, opportunities exist to position your investments to benefit from higher interest rates. Investors may want to consider investing a portion of their capital in a fund that has an absolute return mandate or a specific target to outperform inflation. With riskier assets like equities, these funds have longer investment time horizons, to deliver superior real returns over time, but are typically more volatile.
South Africa has to overcome a number of challenges to address the poor household savings situation. “If we continue as we are at the moment the gradual slide will continue,” says Dempsey. The retirement reforms proposed by government are a good start, as are the innovative savings products developed by Treasury and the Post Office. But to really make progress, Dempsey says we have to find a national solution to the unemployment problem.