Choose Preservation or Poverty
“South Africans are failing when it comes to financial wellness”
“The impact of not preserving retirement savings is devastating"
South Africans’ dreams of a comfortable retirement face a gloomy reality. Research shows only 6% of South Africans will afford to retire comfortably. About 85% of retirement fund members believe they have insufficient capital to retire, while 46% think they will not be able to retire at all.
Yusuf Nanabhay, Head of Product Development at Momentum FundsAtWork says: “South Africans are failing when it comes to financial wellness. One of the reasons is the failure of members to preserve their retirement savings when changing jobs.”
Over 64% of employees rely solely on their company retirement fund to accumulate retirement savings. Yet over the past 15 years, 61% of members have withdrawn their retirement savings instead of preserving them.
“It is clear that retirement fund members are unaware of the devastating impact of not preserving their savings. Many members use retirement savings to pay off debt. While mounting debts may make this seem necessary, it seriously impacts their ability to retire”, says Nanabhay.
South Africa’s soaring consumer debt means that about 9.3 million South Africans cannot honour their credit payments. With estimates that 47% of the workforce has an impaired credit record, no wonder employees use retirement savings they should preserve to repay debt instead.
Nanabhay explains that the accumulation of the first 10 years of savings makes up about 50% of ultimate retirement capital. With a constant contribution of 15%, after 18 years investment earnings eventually contribute more money to retirement savings than annual contributions. Spending this savings foundation is financial suicide.
For example, if a member starts working at age 25 and contributes a steady 12% per annum, but then withdraws her investment at 30, she would have to increase her contributions to 16% for the next 35 years to catch up her fund shortfall. If she had to cash in her retirement fund at 50, she would have to contribute 59% per annum for the next 15 years to catch up, a clearly unsustainable solution.
Government has responded to members’ lack of discipline by announcing that preservation of retirement fund savings will become compulsory from P-day, currently planned for some time after January 2016.
Ironically, when Government initially voiced its plans to make preservation compulsory, many employees resigned and even divorced to gain access to their savings in fear that the Government intended to “nationalise” retirement savings.
These fears are baseless since vested rights prior to P-day will be protected with future contributions after P-day being restricted. . This is a positive step as it will not only allow fund members to reach their retirement goals, but will also ease the burden of destitute retirees on their families and the Government.
Nanabhay says: “In this new scenario, the trustee’s role is pivotal. Trustees must select a default preservation option that gives all members a high probability of reaching their retirement goals, while also meeting Government’s requirements for cost-effectiveness”.
While traditionally cost effectiveness has resulted in a more standardised offering with less flexibility, the challenged faced is to develop a solution that meets the needs of all members through customised solutions for members with different financial needs while still meeting their retirement goals in a cost effective manner.
“We must also ensure that there is still value for financial advisors, as good advice remains fundamental to financial wellness. Advisors may be discouraged to assist members if the financial incentive to do so is too low”, adds Nanabhay.
“Enforced preservation of retirement savings is a step in the right direction. Hopefully the exclusive club of comfortable retirees will soon be open to all South Africans”, concludes Nanabhay.
