A critical role for advisers
Bruce Whitfield
Katherine Barker
Sadly, there are three things that are certain in life and that is death, taxes and volatility.
Coincidentally, at the launch of Momentum FundsAtWork, influential business journalist and radio presenter Bruce Whitfield mentioned how change and volatility is an ever present constant in life. Yet, it is always surprising to hear that people are afraid of investing or saving for retirement because of change or volatility.
At the moment a grim picture of retirement saving is painted in the South African landscape. Many South Africans either do not have the money to contribute to savings after their monthly budgets have been exhausted, or they feel that saving for retirement is just not that important.
The Momentum/Unisa Consumer Financial Vulnerability Index for the third quarter of 2017 shows that South Africans are more financially vulnerable than ever. This, coupled with South Africans’ poor savings culture, places income replacement ratios at retirement under even more pressure.
The questions we need to ask
Shelley van der Westhuizen, Head of Business Financial Wellness at Momentum Corporate said, “With so much outside of the control of the consumer or employer, perhaps we’ve reached a point in our economy’s history where people are ready to take back their economic power and use all the tools that they have at their disposal to increase their financial wellness.”
Most questionable in the employee benefits arena, as highlighted at the FundsAtWork launch, is if employees are prepared for retirement. Are the moving parts in place to secure a comfortable retirement? How can employers and financial advisers, in looking after employees’ financial wellness, facilitate their employees’ retirement – and what responsibility do they have?
The “average member” doesn’t exist
Most retirement fund members will face serious problems at retirement, unless employers, trustees and their financial advisers focus on key levers to improve the probability that members will reach their desired retirement outcomes.
Katherine Barker, Head of Momentum FundsAtWork, says South Africans are simply not saving enough for retirement. Assuming the current low levels of preservation when changing jobs persists, the average member faces a retirement income which is less than 10% of the salary they will receive just before retirement. For many, this equates to a monthly retirement income of less than R2000.
Barker explains that the recently-implemented default retirement regulations, which try to ‘nudge’ members towards better value for money investment options and encourage members to remain invested, should help to boost retirement incomes.
She also believes that the cost of implementing these regulations and the additional trustee responsibilities they introduce will accelerate the move to umbrella funds. This is a good thing, according to Barker, as the inherent cost-efficiencies and flexibility of umbrella funds can potentially increase replacement ratios significantly.
However, Barker says, “Umbrella funds need to remember that the “average member” doesn’t exist. It’s important for these retirement funds to offer the flexibility required to ensure solutions can be tailored around members’ different needs. Pulling the levers that will improve replacement ratios and deliver each member’s desired retirement outcomes should be a key focus for those in retirement fund management.”
According to Barker, a good starting point is greater flexibility in contribution levels. This involves creating the functionality for members to automatically increase their contribution rate annually or make additional voluntary contributions towards retirement savings. Such an approach enables members to improve their replacement ratio, while deriving optimal value from the tax deductibility of retirement fund contributions.
South Africans change employers on average every five years and around 90% of these employees cash out their retirement savings in the process. Barker says that a ‘smart exit’ process which facilitates informed decision-making when changing jobs, coupled with umbrella fund efficiencies and flexible contributions, can push average replacement ratios up to 50%, which is closer to a monthly pension of R8000.
Barker also believes in the benefits of outcomes-based investing, which puts members’ goals at the centre of an investment process designed to achieve the highest possible returns for the lowest possible risk. Always mindful of managing risk, this approach has the potential to improve replacement ratios by enabling funds to invest more aggressively for the long term.
Financial advisers’ key focus
“Financial advisers are pivotal in enabling employees to make empowered choices. They delve deep into members’ needs and then use this information with their expertise to come up with the best solution for them. This proposed solution should consider all aspects of members’ financial wellness. These choices will typically include the most appropriate retirement fund contribution, best age at which to retire, investment strategy and optimal levels of insurance,” says Barker.
Furthermore, employers and trustees should review retirement and insurance benefits to ensure the optimal mix of benefits for achieving retirement outcomes according to Barker. Insurance flexibility that reduces over-insurance facilitates the flow of more money to retirement savings.
Barker says that rewards are a “not-so-obvious” lever for improving replacement ratios. Rewards can be creatively structured to incentivise behaviour that enhances financial wellness, on the road to retirement and at retirement, thereby further boosting members’ retirement savings.
Barker concludes, “Given the magnitude of the current retirement savings gap, increasing replacement ratios to achieve desired retirement outcomes may appear daunting. However, smart re-engineering which pulls some key levers can improve replacement ratios significantly and help deliver the desired outcomes.”
Editor’s Thoughts:
Whitfield said South Africa is increasingly vulnerable and advisers play a critical role in helping their clients achieve the best retirement outcomes possible but are we asking the right questions? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
I know that most readers will feel that my take on this (and most of life's pressing issues), is oversimplified; But allow me to say the following...
Although I do agree with the general direction of the article and some comments by Shelley van der Westhuizen, I wish to emphasize the one glaring and understated "lever": The individual needs to take responsibility for his / her life.
In society at large there is a seemingly unstoppable flow in the direction of keeping any and everybody else responsible for something that is wrong in any group or individual's life. This, when the situation could have otherwise been resolved if these individuals or groups had taken responsibility in the first place and held themselves accountable to the "right" thing.
I think that this is the case, because of the fact that it is unpopular and difficult to effectively encourage people (let alone ourselves) to do the difficult, time-consuming, sacrificial, but right things now, in order to reap benefits later.
It is also a cultural phenomenon of modern complex society.
If these new default retirement regulations do in fact "force" employees to take some of these steps, then I guess it will, at least, synthetically, help. But the root cause, i.e. entitlement and blame-shifting has still not been addressed.
It will not be addressed for some time, if ever. Why? Because it is so much easier to blame, than it is to build up something useful. Report Abuse
Policyholders have no confidence in platforms that are not 100% transparent ! Report Abuse