SA’s retirement industry taking charge

In the short term, changes as proposed by National Treasury around the harmonisation and simplification of tax structures and making preservation compulsory for retirement fund members have been generally welcomed by industry players. There has also been talk about bringing costs down as well as making sure that members get value for their money. Some of the retirement reform proposals clearly have been influenced by international trends.

 

On the international front there have been multiple changes impacting the industry.

In the UK, stakeholder pensions were introduced in 2001 to increase the retirement net especially for low income earners. These stakeholder pensions came with maximum fees and other legislated product features such as low minimum contribution rates.

 

Initially these products had a cost cap of 1.00% of the annual fund value. The cost cap was then raised to 1.50% of fund value during 2005 for the first 10 years, from when the product was taken out. It is clear that the UK regulator realised that putting down low cost caps will not necessary lead to higher take-up and increased savings levels. Therefore, the South African retirement industry will have to balance the possible unintended consequence that lower fees could have on reducing savings levels.

 

Financial education and professional advice remains a key component in choosing the correct product to save for retirement. The challenge for the South African retirement industry remains how to bring down costs and increase member value, while still enabling member education and advice in selecting the appropriate solution for individual needs.

Thus the importance of low costs versus higher member value will likely remain an ongoing debate.

 

In South Africa we have already seen that a key industry change is the consolidation of smaller stand-alone retirement funds into umbrella funds. It is highly likely that this industry trend will continue as umbrella funds have proven to be able to provide superior member value and materially lower costs than stand-alone funds, especially those funds smaller than 5 000 members.

Umbrella funds have also changed their offering over the last decade from a retirement vehicle for exclusively very small and micro funds, to funds that can also cater for employers with membership numbers in the tens of thousands. Umbrella funds have changed to become more flexible and flexibility on member and employer level is the key requirement to be able to meet the diverse needs of stand-alone retirement funds while they are consolidating into umbrella funds.

To navigate the flexibility offered by umbrella funds, the role of the financial adviser or the asset consultant has become increasingly important as industry consolidation is accelerated towards umbrella funds.

Globally, retirement ages and increased longevity will become a key in retirement planning. Most European countries' populations, including France, Italy and the United Kingdom (UK), are steadily aging and showing signs that life expectancy is increasing.

In France the legal retirement age is likely to increase should the financial concerns over funding remain. Italy announced incentives to keep people working until age 70 and the UK government will increase the State Pension Age (SPA) to 66 for both men and women by October 2020. The political climate is a key determinant for retirement reform discussions in Europe.

 

The local reality is similar. The Bureau of Market Research at the University of South Africa (UNISA) found that 94% of South Africans reaching retirement age need to continue working, depend on government assistance, or rely financially on family or friends. Evidence of more and more South Africans working beyond their normal retirement age is visible, based on the age of the disability claimants and the number of still-employed members in the Momentum FundsAtWork Preservation Funds over the age of 70.

 

Momentum FundsAtWork supports the changes in the industry considering South African's low replacement ratios and our nation's need to tighten our belts on spending.