Moving with the times

One of the few plusses to come out of the credit crunch is that it has changed the way consumers, and therefore employees, think and behave when it comes to their hard-earned cash.

With the proliferation of communication and information sharing platforms, consumers - and therefore employees - have a much better understanding of the insurance industry as whole. They have also begun to take a much greater interest in how their money is being managed. Accountability, transparency, consumer empowerment and customer centricity have become buzz words in an industry that has recognised the subtle shift in power resulting from better informed customers who have more choice and power than ever before.

Money, money, money

On one side of the scale, for the so-called “blue collar” workers, affordability remains a challenge shaped by the reality of what can be saved for retirement in the face of monthly bills and putting food on the table. The Government’s Pension Reform strategy is looking to address this very question.

However, the more fortunate on the other side of the income scale are also feeling the pressure. Many are over-indebted and increased legislation around the provision of credit has resulted in consumers dipping into retirement savings to maintain their lifestyle and meet financial commitments. On both sides of the scale, the reality is that short term pressures often take precedent over longer term considerations such as retirement funding.

The consequences of cancelling disability and life cover, retirement contributions or policies, must be carefully considered. Statistics show that the average person has 420 pay days to save for retirement. A rule of thumb is that for every five-year delay in saving, the total savings at retirement is halved because of the time value of money, i.e. the compounding effect of interest. As only 10% of South Africans are financially prepared for retirement, the need for adequate retirement savings cannot be over emphasised.

Real value

It is necessary to compare prices, but it is crucial that the benefits and, importantly, the exclusions and conditions of products are compared simultaneously.

Cheap is rarely the best. The optimum option is a product appropriate to the client’s needs, and the advice of a professional financial advisor is often crucial to guide consumers through the process of understanding their needs.

Keeping costs down

Now, more than ever, companies are under pressure where costs are concerned. Many employers are opting to move their retirement funds over from a stand-alone arrangement to an umbrella arrangement. One of the main advantages of an “umbrella” arrangement is that fund charges are shared between all the funds under the umbrella. In addition, companies enjoy the benefit of a full complement of professionals and trustees, independent of the company.

Guarantees sought

Guaranteed funds are increasingly in demand, due to the uncertainty faced in recent times. These funds are more expensive than investment options that have more risk, because they “lock in” a minimum return. Nevertheless, investors shocked by how quickly the financial services market unravelled are prepared to pay a premium for certainty of return.

Advisors should ensure clients understand the difference between a guaranteed fund and a smooth bonus fund.

People define wealth in different ways. Advisors, with the backing of strong and reputable insurers, should encourage clients to get involved and take accountability for their finances, and empower them to take ownership of their financial wellness. The consequences of not doing so will be carried by each individual in their eventual retirement.