Attitudes to retirement savings shows clear need for industry reforms
Retirement has always been a sensitive issue to talk about within social circles. While some see it as a life changing event where you spend your time ticking off the remaining items on your bucket list or enjoying watching your grandchildren grow up, oth
While sitting with the concerns mentioned above, South African pensioners face another unpredictable factor, that of a changing legislative landscape.
South Africans may be increasingly aware of the dire state of their retirement savings, but the low savings rate needs to be addressed through legislative support for compulsory savings and increased education around members’ options at retirement.
This was revealed via the results of the 2013 Old Mutual Retirement Monitor, which was launched yesterday. The annual survey measures pre-retirement perceptions among working South Africans and is based on 1 180 face-to-face interviews.
Reform needed to strengthen savings culture
Craig Aitchison, GM of Customer Solutions at Old Mutual Corporate, says a large portion of the population still has no form of retirement savings in place. “Only 50% of all respondents list retirement as a specific savings objective. Strengthening the savings culture among South Africans has been identified by Treasury as the primary driver of the current retirement reform proposals.”
It also emerged that saving for education remains a high priority among respondents. Aitchison reports that funeral policies continue to enjoy steady support while support of formal retirement products has declined steadily where 58% do not support them.
He adds that this is surprising considering the benefits of belonging to a formative savings vehicle. This is however going to change through the introduction of industry reforms.
“Interestingly, total monthly savings differs significantly between members of retirement funds and non-members, with non-members typically saving almost R1 000 less than members. This is strong evidence of the benefits of a compulsory savings vehicle and a key reason why we applaud this particular proposal by government,” he says.
Rise in retirement dependency
This is alarming as it points to the fact that if they take the sample size as a true reflection on the saving habits of the rest of South Africa, the ‘head-in-the-sand’ approach towards retirement seems to be the most popular.
This means that the majority of South Africans will either be reliant on government to support them during retirement or they will rely on their children.
“As the pressure of rising costs weighs on South African households, respondents are increasingly looking to external sources such as the government and their children to support them after retirement. It’s a trend we saw last year as well and the concern is that this reliance on future generations only entrenches the cycle of poverty.” This will be driven by the fact that while retired parents are relying on their children to support them, this generation is saving for their own children’s education. This makes retirement savings among this generation scarce.
Low levels of engagement and knowledge
As in all previous retirement monitors, general knowledge about the industry and the different options available to them remains very low.
“Just under 60% of respondents indicated that they did not know who their trustees are, which is an increase from 42% of respondents who indicated the same thing in last year’s survey. In spite of this, members still demonstrate high levels of trust in the trustees of their funds and on average rated their level of trust that their trustees would make the right decision on their behalf at 7.6 out of 10,” says Aitchison.
The survey also revealed some interesting insights into the preservation behaviour of respondents. Of the respondents who took cash on leaving the fund in the past 15 years, 61% accessed their entire entitlement in cash.
If this is not scary enough, Old Mutual adds that 61% of respondents who changed jobs in the past 15 years withdrew a portion or all of their retirement fund benefits in cash with the majority of them withdrawing the full amount. Fifty-two percent of lower income holders would take their benefit in cash when leaving their fund before retirement. The majority of this 52% would take all of their benefits in cash.
“The damaging effects this can have on retirement savings has become a major concern for Treasury, which has now proposed some kind of compulsory preservation vehicle for South Africans.”
However, there needs to be an educational drive in this aspect as 57% of the respondents say that they know little or nothing about the proposed reforms that the sector will soon be going through. A further 18% know about the reforms and are confident that they will change improve the industry.
Aitchison says the 2013 Old Mutual Retirement Monitor results reveal a concerning lack of awareness and education about retirement annuities across all income, age and fund membership levels. 33% of respondents have only heard about annuities previously, while 29% have never heard the word ‘annuity’ used in the context of their retirement planning.
“Old Mutual research has shown that members often make uninformed decisions upon retirement. This has raised the question of how trustees and other stakeholders can better assist members on retirement – especially when it comes to annuities,” concludes Aitchison.
Editor’s Thoughts:
While it is clear that there needs to be an educational drive in the industry, the key issue of who will steer the educational ship remains a possible stumbling block in the industry. While there will be a genuine desire from companies to drive this, the monitor shows that the majority of respondents who prefer one-on-one interaction prefer to turn to advisors.
However, another key issue comes in here. With the FSB currently mulling their stance on the whole fees vs commissions issue, brokers will be reluctant to move towards a model which will be detrimental to the industry. Aitchison indicates that the majority of the public cannot afford an upfront fee for advice which would have a dire effect on advisors.
In order to counter act this, Old Mutual told the FAnews that they have reassessed their educational programmes which push the boundaries and tread the fine line between education and advice. Is this a sustainable model to follow? Can the average adviser follow a similar strategy? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].
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