Traditional thinking of retirement is becoming obsolete

Johan Gouws, Head of Absa Asset Consulting

FAnews recently attended an ABSA event on employee benefits where a few interesting topics were discussed.

One of the topics that was unpacked was retirement, and the different views on what the retirement issues are. One of the discussions lead to the topic of Retirement Capital Deficiency Syndrome (RCDS).

An uncomfortable thought

Johan Gouws, Head of Absa Asset Consulting, defines RCDS as the extent to which accumulated retirement capital will be insufficient for providing a regular income system in order to meet a required standard of living. He adds that it is more difficult for clients to talk about RCDS than it is for people to talk about Aids or Cancer.

“Talking about RCDS makes people very uncomfortable as it is a situation which catches the public by surprise. For most of their lives, they live in denial and don’t realise they are suffering from RCDS. They wish they could go back to the start of their working lives and do things differently,” says Gouws.

Update your point of view

Gouws is of the opinion that the traditional thinking of retirement is becoming obsolete because of the way the world is being defined. “Savings are under pressure, the public is less confident in making financial decisions, and member apathy is on the increase because they simply trust the default offerings provided by the funds they belong to,” says Gouws.

Despite this, the level of satisfaction amongst the public is low. Gouws adds that as household expenditure increases, debt increases. In addition, the public is looking for creative ways to generate an income that will serve them during retirement.

Feeding the debt monster

It is a widely thought that South Africa has one of the world’s highest public debt levels. When times are tough, people tend to turn to credit to get them out of the hole they find themselves in. And credit is being given to people who cannot afford it.

“Property is a good guarantee of a regular income during retirement if it is managed correctly. However, there is currently a trend in the market where the public is taking out a second mortgage in order to gain some funds for retirement. However, this compounds the pressure currently being put on the sandwich generation who have to put their own goals and aspirations aside in order to provide for their own family, their parents, as well as save whatever they can for their own retirement,” says Gouws.

Lack of knowledge lack of foresight

Debt is probably the root cause of RCDS as it can be a vicious beast that can cause an endless downward spiral where money can be lost hand-over-fist. According to research done by Absa, more than half of the credit consumers in South Africa are behind on their debt payments.

The vicious cycle this causes is simple; people will start to think that if they cannot manage their debt, how will they manage providing for their retirement? Because of this, members become very reliant on their funds and tend to trust the default options they choose when they start working for a company.

“This is putting significant pressures on fund managers and trustees as they need to extract as much value out of an investment as they can. This means that product providers need to make sure that products suit everyone’s needs, not matter what their circumstances are,” says Gouws.

Where to go?

An important question linked to this is where does the responsibility of guidance lie? Does it lie with the fund manager, the trustee, or the employer?

“There are a few basic areas where companies can increase member interaction. The first is their contributions; when a member joins a company, they will probably opt for the default contribution rate. But how many companies are actively encouraging their members to revisit this decision as their earning potential increases through promotions within that company. Another area where companies can increase engagement is through communications. Research undertaken by Absa shows that only one in every ten employer provides communication to members on the tax implications of making withdrawals from their retirement savings,” says Gouws.

Editor’s Thoughts:
While there is a major focus on the value of advice to the customer, we need to take a step back and ask if there is proper value on advice from the client’s point of view. Do they really appreciate the advice given to them by a professional adviser when it comes to retirement? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.