Lessons from the 2009 Benchmark employee benefits survey
The pension fund environment is constantly changing. In recent years stakeholders have had to accommodate the shift from defined benefit to defined contribution, deal with the tricky issue of pension funds surplus apportionment, rewrite the mortality book to reflect the impact of HIV/Aids and engage with government and National Treasury around retirement fund reform. What challenges will the industry face in the future?
To find out we attended Sanlam’s 2009 Employee Benefits Benchmark Survey held at Vodaworld, Midrand on 22 July 2009. The annual survey, now in its seventeenth year, was compiled with the assistance of BDRC, an independent market research company. BDRC questioned 200 principal officers at stand-alone defined contribution funds and 100 employer representatives of umbrella funds. The presentation was spiced up with film clips of interviews with ordinary pension fund members. Survey results can be viewed http://www.sanlambenchmark.co.za/index.php
Contribution trends
Dawie de Villiers, survey co-author and chief executive of Sanlam Structured Solutions was on hand to present the survey findings. The first of four major themes covered by De Villiers was that of retirement fund contributions. The survey confirmed an improvement in employee/employer pension fund contributions since 2002. The average employer contribution climbed to 9.9% in the current period, from 9.5% in 2008 while average employee contributions also crept up marginally, from 5.5% to 5.9%. “Despite a sluggish economy, more money is being set aside for retirement,” said De Villiers.
But to get to the actual portion applied to retirement provisions one has to strip out the cost of death and disability cover and fund administration. Sanlam’s survey shows a slight increase over 2008, with 1.9% of monthly gross salaries going to death benefit premiums, 1.3% to disability benefit premiums and 1.3% to administration expenses. De Villiers also warned that “an increase in disability claims through recession might lead to an increase in premiums in coming years.” De Villiers introduced administration costs as the second theme in his presentation. He said that it remained difficult to break the 1.3% administration charge (levied on gross monthly salaries) into component parts. He estimates pure administration costs account for approximately 0.35% of this charge. Another way to unpack the charge is to consider the average annual cost as a percentage of assets. The 0.9% total comprises 0.25% in pure administration expenses, 0.3% in investment advisor fees and the balance for remunerating actuaries, auditors, fidelity cover, levies, SARB reporting and the likes.
Once fees are striped out, the net amount allocated to retirement savings in 2009 reduces to just 11.3%. This is some way off the 2002 suggested target of 15%. The consensus is you should be able to retire comfortably provided you save 15% of your gross salary over a 35-year period and preserve your retirement funds throughout. “We hope that the increase in contributions is a continuing trend and the result of government and industry’s efforts to communicate the importance of savings,” said De Villiers.
Death and disability before retirement
One of the interesting observations from the 2009 Benchmark Survey dealt with the appropriateness of existing levels of death and disability cover. On average, death benefits reached 3.5x final salary in the period. Although this cover is reasonable, De Villiers questioned whether it was appropriate given 40% of today’s 20-year-olds won’t reach retirement age. Life expectancy in South Africa is severely impacted by unnatural deaths (including crime and vehicle accidents) and the impact of the HIV/Aids pandemic. A higher level of death cover is essential under such circumstances as dependants will be left without a breadwinner for relatively longer periods of time. The survey also revealed that 62% of fund members had no disability benefits whatsoever, leaving a large cover gap in the survey sample.
Sentiment influences investment expectations
Survey questions on investment returns – the third presentation theme – provided plenty of fodder for students of behavioural finance. When participants were asked if they expected 2009 market returns to be higher or lower than 2008, 57% indicated the latter. This contrasts strongly with the view expressed in the previous survey. When the 2008 survey was compiled the pension funds industry was awash in bull market euphoria, with the All Share Index peaking mid-2008. It was impossible to find a negative market view. The herd mentality that takes hold during periods of strong equity market returns sways pension fund managers as easily as the man in the street.
The global financial crisis severely impacted 2009 pension fund returns. Almost a third of funds achieved investment returns in the 0% to 10% bracket against an average return across all survey participants of 20% in 2008. And another third returned negative results for the period. “Although in its early days in South Africa, the ramifications of the global economic crisis are still to be fully realised,” said De Villiers.
Editor’s thoughts: One of the most disturbing revelations in this year’s survey was that 86% of pension fund trustees prefer no involvement with members after retirement. This is appalling given increasing life expectancies among the well-to-do retiree. How would you suggest retirees secure ongoing advice in their retirement years? Add your comments below, or send them to [email protected]
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