Sanlam Employee Benefits (SEB) released the results of its 2011 Benchmark survey, a comprehensive annual review of South Africa’s retirement industry. Now in its 31st year, the most recent research has allowed Sanlam to take a retrospective look at retirement in South Africa over the past 30 years. This has revealed that changes made in the 1990s to shift the risk and responsibility of retirement savings from the employer to the employee, have left many employees worse off. This, and other key findings, have pointed — in Sanlam’s opinion — to the need for an industry sea change in order to ensure more compatibility with the needs of today’s consumer.
The Benchmark Survey polled 1 303 retirement fund trustees, principal officers, retirement fund members and pensioners. The stand-out findings include:
- South Africans are fairly well educated about the risks they face by not saving adequately for retirement, but even so are not taking responsibility for their retirement provision
- Fifty-three percent of respondents interviewed in 2011 believe that they are on track for retirement, yet nearly one third do not know how their retirement savings have been invested and 29% of respondents don’t know that they have a choice in how they are invested
- Of those who opted for a default fund, 56% trust that trustees will make sound investment decisions on their behalf. However two thirds of members cannot name a single trustee whom they are entrusting with their savings
- Of the one in five members who have switched jobs, 70% cashed in their retirement fund and only 18% preserved their retirement saving. In most cases the savings are used to settle short-term debt
- Eighty-four percent of trustees are concerned about how members use their retirement benefits, yet only 22% want any further involvement once the member has cashed in their funds or retired
- The average fund value per member declined significantly during the sub-prime crisis of 2007 and 2008, and has only now recovered to their pre-crisis levels. Members have lost out on four years worth of compounding of returns on their savings, and with global markets currently in turmoil again, this risk is set to continue
- More than 14% of standalone retirement fund principal officers expect their members to move into umbrella funds, in line with government’s drive to consolidate the industry
According to Dawie de Villiers, chief executive of Sanlam Structured Solutions, one of the key developments over the past three decades — the shift in the 1990s from the risk and responsibility of retirement savings resting with the employer (defined benefits) to it resting with the employee (defined contributions) — has actually left many retirement members worse off.
“While we do not challenge the rationale behind the move away from the defined benefits system, the research shows that members are still not accepting responsibility for their own retirement savings — and many members aren’t actually aware that they carry the risk.” The research indicates that of the one in five respondents who resigned or switched jobs over the past year, more than 70% cashed in their retirement funds, and only 18% actually preserved their funds.
De Villiers says while some retirement fund members thrive on the freedom to align their retirement contributions with their own specific financial circumstances, many find the range of options bewildering. “Instead of looking for help, most members push the responsibility of saving for their post-work years to the bottom of their priority list until about five years before retirement when the uncertainty of their future is more imminent.”
Danie van Zyl, head of guaranteed investments at Sanlam Structured Solutions, believes that trustees also haven’t fully immersed themselves in the DC environment and are not doing enough to facilitate an efficient retirement fund system on behalf of the member. “The plight of retirement saving in South Africa isn’t helped by the fact that most trustees view their responsibility to be over when a member retires or withdraws from the fund,” says Van Zyl. The research shows that 84% of trustees are concerned about how members use their retirement benefits, yet only 22% actually have any further involvement once the member has cashed in their funds or retired.
A further trend identified by the research is the move away from stand-alone employer-sponsored retirement arrangements to commercial umbrella fund arrangements sponsored by major financial institutions. Twenty-nine out of 200 stand-alone fund principal officers indicated that they expect their members to join umbrella funds in the next 12 months. But consumer pressures are mounting, and it also appears that only the very best umbrella funds will survive this shift as the umbrella fund industry is itself consolidating, driven by Government to achieve a better deal for the man-in-the-street. In fact, National Treasury stated in a policy paper released alongside the 2011 National Budget that “although the number of active funds has declined significantly to about 3 200 today, the Minister feels more consolidation is both desirable and achievable”.
Continuing to look at the past 30 years, Van Zyl says: “In our first survey in 1981, only 75% of funds were open to members of all races. As South Africa’s political landscape has evolved, so too has the retirement industry, with the discrimination along the lines of gender and race seen within the industry 30 years ago, now completely phased out — yet the retirement saving problem has still not improved.”
The way forward
Van Zyl says that the current retirement industry model — developed in a post-World War II environment when people typically stayed at the same company until retirement — simply isn’t servicing the modern day consumer. “While the industry has acknowledged repeatedly that something needs to be done to improve retirement saving levels (the 2011 research shows that 56% of retirement funds now offer a formal advice strategy and 76% offer pre-retirement counselling), education and communication endeavours are not having a strong enough impact. What is needed now is a shift from focusing on improving knowledge, to focussing on changing behaviour.
“More and more trustee meetings are taken up with adherence to legislation and governance and ticking boxes instead of ensuring that members have a decent income in retirement. After three decades of analysing the South African retirement industry, perhaps it is time to start designing funds with the end result in mind: this being adequate retirement income, measured by a replacement ratio (members’ net income after retirement relative to net income before retirement). Why not clearly state this objective to members?” says Van Zyl.
“We need to accept that members are human beings, with normal human biases and failings, and are faced with ever-increasing complex financial decisions. It should be our role as an industry to stack the odds in a member’s favour by clearly guiding members to make wiser financial decisions.”