The retirement landscape is constantly changing. Over the past couple of decades South Africa has seen two major trend shifts in retirement savings. First, the industry morphed from a predominantly defined benefits environment to one where defined contribution options are the order of the day. Second, the myriad small pension funds have made way for significantly fewer large funds (comprising single employer or umbrella funds). The former “trend” shifted the burden (or risk) in retirement savings from the employer onto the individual saver, while the latter was due to the rising cost of pension fund administration.
The science of retirement planning has changed too, driven primarily by improved longevity expectations, a better understanding of financial needs per life stage and volatile investment returns. Top of mind for financial planners is to ensure their client’s have enough capital to survive a much longer retirement than previously expected. Latest population statistics confirm there are at least 450, 000 “centenarians” in the world. The USA currently has more than 72, 000 aged 100-plus, with 30, 000 in Japan, 9, 000 in the UK and 7, 000 in China. Four decades from today the centenarian populations will top one million in each of the USA, Japan and China!
Savings in South Africa 2011
South African savers are performing poorly on both risk and savings stages. On the risk front an independent “gap” study commissioned by the Association for Savings & Investment South Africa (ASISA) determined that we were under insured to the tune of 62% for death and 68% for disability! And the savings figure is equally disappointing. It is said that only six in every 100 of the country’s citizens will retire comfortably – the rest will be forced to turn to government, family or friends for additional financial assistance.
As a professional in the financial services industry you should be familiar with factors influencing retirement outcomes. These include the savers’ net contribution rate, net investment return, annuity factors used to calculate the annuity income after retirement, and – most importantly – the time period over which the contributions are made! The Holy Grail of retirement saving is to achieve a replacement ratio (your retirement income expressed as a percentage of your final pre-retirement salary) of 75%. And the magic formula to achieve this is given as: Save 15% of your gross salary for a period of at least 25-years in an appropriate mix of assets, preserving religiously whenever your employment situation changes.
“Our own research tells us that there is a huge expectation gap between what members of retirement funds expect and actually achieve in retirement,” said Carol Atkinson, Head: SMME Market Segment at Momentum Employee Benefits at a recent Momentum FundsAtWork presentation. Fund members expect to sit back and live the good life in their retirement years, but end up struggling to get by.
Blame it on indifference...
Atkinson drew from Momentum’s extensive retirement industry experience in an attempt to explain South Africa’s lacklustre financial performance. “Members are not proactive in managing their benefits – instead preferring a low touch, low interest and low involvement to their retirement funding,” she said. Employees sit back and allow their employers to call the shots by stipulating how much of their gross salary should go to retirement funding, for example… And the problem is compounded because most savers rely on pension or provident funds as their only source of retirement savings while possessing limited understanding of how to set and meet their retirement objectives.
A lack of effective “dynamic” financial planning was also identified as an area of concern. Momentum hopes to address this problem through their FundsAtWork umbrella fund, which has introduced a new product option – called Narrator – to allow employees’ retirement and insurance benefits to adjust automatically as their needs change at certain ages. Narrator comprises bundled retirement, death and disability benefits. The employer makes the initial choice of the total contribution and each member then has death cover, income disability benefits and an investment portfolio structured according to their entry age.
“Although life stage investment products are not new, this is the first time that the concept of life stages and changing needs over time has been applied to insurance benefits as an integrated and holistic approach,” said Atkinson. “Narrator follows Momentum’s house view on retirement and insurance benefits, which are packaged together to make the most of the contribution paid by the employer and the member, giving members peace of mind that their needs are met.”
Editor’s thoughts: There is no “one size fits all” solution to the retirement planning riddle. A sensible “template” with certain automatic age-related adjustments probably makes more sense than allowing fund members to languish in an inappropriately structured solution. Do you approve of financial products with automatic life stage adjustments, or do they negatively impact the financial advice process? Please add your comment below, or send it to gareth@fanews.co.za
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Added by Ben Holtzhausen, 15 Aug 2011