Andrew Rumbelow, CIO at SMMI
Compelling research on the way global market volatility, lower returns and increased life expectancy are set to impact on savings, has signalled warning bells for South Africans. These compounding factors will put pressure on South Africans who are planni
“Now is the time for the industry to be proactive and take an in-depth look into whether defined contribution funds are serving their rightful purpose in a changing economic environment,” said Rumbelow.
On average, South Africans will have only 12% of their salaries to carry them through retirement, a figure far lower than the 60% global average, according to the Organisation for Economic Cooperation and Development (OECD).
Government bond yields are at an all-time low. (Source: Global Financial Data – The Economist). The level has fallen to below one-and-a-half percent in the US and UK, and around 7% in South Africa.
“People are now sitting on bond yields that are incredibly low. This is what we use to fund our pensions. So if you are retiring today, you have a challenge on your hands,” cautioned Rumbelow.
Further possible financial repression on the back of the global financial meltdown could also take its toll. The number of risk-free assets is declining, with massive liabilities still a feature of the fallout of the global financial crisis, and interest rates likely to stay low for many years to come.
“You have this massive growth in the number of retired people who want to consume risk-free income assets, yet these are declining. It’s not a picture we want to see, but it’s important to know, so that we can ask the right questions internally,” added Rumbelow.
The growth in the number of retired people is as a result of higher life expectancy, particularly in industrialised countries. Apart from contributing less to the economy as they retire, many people have to save even more for their retirement.
The retirement industry collectively needs to find ways to move beyond the current defined contribution system. “Trustees need to make big changes to their benefit structures to enable their members to retire with dignity,” says Rumbelow.
While trustees tend to be focused on adhering to the plethora of regulatory requirements, they should also be looking at how to get the best returns for their members. “The industry needs to acknowledge that we are collectively seriously underfunded,” says Rumbelow. He suggests that asset managers and trustees need to engage and ensure member’s liabilities are explicitly taken into account when planning for retirement and making investment decisions.
Noleen Daniels, Compliance Officer at SMMI further mentions that “These regulatory requirements have placed a huge and onerous responsibility on Trustees.” “With the introduction of the relatively new Regulation 28 requirements, SMMI has engaged extensively with stakeholders in its attempts to ensure that trustees are provided with the comfort that the retirement funds at all times comply with the regulatory requirements. To this effect, SMMI has implemented a new compliance system and continues to engage with asset managerson the data required for investment compliance monitoring and reporting to assist the Trustees in fulfilling their fiduciary responsibilities.” says Noleen.
Rumbelow cautions that the industry needs to make sure that the portfolios it puts in place, particularly the default portfolio structures, are suitable for the members’ liabilities. The current DC system is undoubtedly failing a large number of savers – and the industry needs to engage and help build a more desirable outcome for retirees.
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