Retirement study: employees/employers continue to contribute less

18 June 2008 Sanlam Employee Benefits

Complementary fund member survey reveals less than one third think savings sufficient to retire

According to results from the retirement fund industry’s benchmark study from Sanlam Employee Benefits, the trend of employees and employers contributing less to retirement continues. The annual survey of principal officers and trustees from 200 South African funds also reveals a number of other interesting findings, including:

· Lower investment returns expected in 2008;

· Growing interest in socially responsible investments; and

· Expanded use of the Internet and intranets for member communication.

In addition, Sanlam Employee Benefits’ 28th survey has shed some light on retirement fund trustees’ and principal officers’ views on the Government’s proposed National Social Security System (NSSS). When asked about their general views of the proposed scheme, 43 percent of respondents were negative about it, while 35 percent were positive. Some of the key concerns expressed by respondents included the Government’s ability to manage such a fund and increased costs to taxpayers.

For example, only 61 percent of respondents believe that the NSSS will be implemented and only nine percent believe that it will be implemented by 2010. If implemented, 49 percent of respondents believe that members should be allowed to opt out of the NSSS. Only five percent of respondents believe the NSSS should be compulsory for all South Africans. Assuming that the proposals for the NSSS are passed, 42 percent of respondents indicated that they expect more communication and information from employer funds prior to the implementation of the scheme.

To complement the results of its annual survey focused on the retirement fund industry, Sanlam also conducted 300 ‘man-on-the-street’ on-camera interviews in Cape Town, Durban and Johannesburg (in addition to 300 telephonic interviews) to compare and contrast these results against retirement fund members’ opinions and expectations. Some of the standout findings from these surveys include:

· Only 30 percent of members think they will have enough money to live on when they retire;

· 60 percent of respondents recalled hearing nothing about the government’s retirement funding and social security reform process;

· More than 80 percent of members indicated that retirement savings are the most important need for them rather than short-term death and disability benefits;

· 40 percent of members claim to understand information communicated to them by their retirement fund; and

· 60 percent of members acknowledged that they do not have the knowledge or skills to make investment choices.

Commenting on the results of the complementary member ‘vox pop’ questionnaire, Dawie de Villiers, survey co-author and CEO of Sanlam Structured Solutions, observed: “Average South Africans are uncertain about the future of the retirement landscape, poorly informed about the proposed government reforms, ill-prepared to make investment choices and sceptical about the sufficiency of their retirement savings to maintain a comfortable lifestyle.”

As a key indicator of whether individual South Africans will have enough to maintain their standard of living when they retire, statistics from the Sanlam Employee Benefits survey show that employer contributions have declined from ten percent in 2006 to 9.5 percent in 2008, while employee contributions have dropped from six percent to 5.5 percent. In total, the average contribution to retirement funds has declined from 11.5 percent in 2006 to 10.9 percent in 2008.

Calculations conducted by Sanlam show that such contribution levels will result in a maximum average replacement ratio of only 30 percent. (A replacement ratio is a measure of one’s income during retirement relative to that enjoyed during productive years.) Given this low figure versus an average of 56 percent among OECD countries and 75 percent among North African countries, as well as South Africa’s high levels of unemployment and poverty, the majority of South Africans are not readying themselves for a comfortable retirement.

“South Africans continue to be poor savers and the hope is that the government’s proposed social security reform will help mitigate this negative trend by compelling every income earner to save for their retirement,” said Elias Masilela, survey co-author and chief strategist for financial sector developments with SEB. “Having established a sophisticated and successful fund management business, South Africa’s retirement fund industry will have an important role to play in the NSSS as part of a public private partnership, communicating the need to start and maintain consistent savings, as well as efficiently administrating and growing accumulating funds.”

Fund member communication and understanding

In terms of member communication, 95 percent of funds now offer an annual benefit statement, with 68 percent of them providing a rule booklet and 44 percent an annual trustee report. As far as understanding goes, 93 percent of senior leaders (up from 88 percent in 2006) while only 50 percent employees understand more than half of the information provided.

According to the study, the target for feedback and queries from members is also changing. While the majority of umbrella funds and hybrid funds direct their retirement fund-related queries to the human resources department, 58 percent of retirement fund queries (up from 51 percent in 2006) are now addressed by the administrator and enquiries directed to the principal officer are down from 53 percent in 2006 to 42 percent in 2008.

There is a growing trend in the number of funds using the Internet and intranets to give members access to information with 60 to 65 percent of funds using these facilities; up from 55 percent in 2006. Related to this, 68 percent of fund members are using these facilities to directly access fund information; up from 52 percent in 2006.

More than 70 percent of members now have direct access to pension fund information via work or private Internet or intranet facilities. Consistent with previous survey findings, these facilities are mostly used to provide fund rules (77 percent), investment portfolio information (68 percent), a member booklet (62 percent) and investment returns information (52 percent). Almost 70 percent of funds also offer an online modeller or calculator, investment training material and relevant articles.

Socially responsible investments

While only 16.5 percent of funds have a policy to invest a portion of assets in socially responsible investments, this is up from 9.0 percent in 2006.

HIV/AIDS management

In terms of HIV/AIDS management programmes, 64 percent of respondents indicated that the employer has one in place; down 70 percent in 2007. It is important to note that an employer is more likely to have a management programme in place when membership of a fund or the size of assets managed is high. For example, 91 percent of funds with more than 5 000 members offer such a programme.

Investment performance, choice and advice

Survey respondents reported an average investment return of 20 percent on funds in 2007, a figure significantly higher than the benchmark median return of 14.78 percent on global balanced portfolios. This year, however, 70 percent of respondents expect lower investment returns.

Almost 46 percent of funds surveyed offer member-directed investment choice, up from 43 percent in 2007. The most popular investment choices are moderate linked portfolios (50 percent) and guaranteed or smoothed bonus investments (45 percent). Member-directed investment choice is particularly popular among umbrella funds, with 68 percent of these funds indicating that it is available to all or some members.

In terms of investment choices, almost 84 percent of funds are either satisfied or very satisfied with these, with the main benefits seen as the variety of choices (37 percent), performance (21 percent) and member satisfaction (21 percent). Among investment options available to members, the absolute return option has decreased significantly from 49 percent in 2007 to 36 percent in 2008.

Within funds with member-directed investment choice, respondents indicated that most members (58 percent) rely on the trustee or default choice and, as such, do not choose their own investments. Among funds offering member-directed investment choice, 63 percent provide members with financial advice.

About the Sanlam Employee Benefits Survey

The 2008 survey was conducted among principal officers of 200 retirement funds in South Africa ranging in size from small (less than 100 members) to very large (more than 5 001 members), with 27 percent of the principal employers from the manufacturing sector and 15 percent from financial services, the two largest sectors represented. The breakdown of funds included pension (35 percent) and provident (64 percent) structured on a defined contribution basis, as well as umbrella funds. The survey was conducted by the independent market research agency BDRC via face-to-face interviews and performed according to the South African Marketing Research Association Code of Conduct.

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