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Clearing that retirement hurdle

22 June 2022 Gareth Stokes

The average combined retirement benefits contribution by employers and employees to standalone retirement funds topped 17.5% in 2022, according to the latest Sanlam Benchmark survey. Commenting on the result, Sanlam said that “the pressurised business environment had led to a slight decrease in contributions from employers in both standalone and umbrella funds, while member contributions had risen somewhat to compensate for the shortfall”. Standalone fund employees are contributing 17.53% of their gross salary to employee benefits, jointly between employer and employee, compared to a 14.65% contribution in the umbrella funds space.

Premature celebrations

At first glance these numbers seem close enough to the 15% of annual gross salary that financial planners and retirement benefits consultants have been urging their clients to aim for. After all, we have been telling retirement savers that the formula for a successful retirement journey is to save at least 15% of their annual salaries, from as early as possible, and to always preserve. The trouble is that the aforementioned contributions are inclusive of administration costs and group benefit contributions, which Sanlam reported as 0.5% and 1.82% for standalone funds, and 0.6% and 2.48% for umbrella sub-funds. 

By our calculations this would mean retirement funding contributions of around 15.21% and 11.57% in standalone and umbrella funds respectively, suggesting that the oft-praised umbrella fund structure is falling behind. This calculation was confirmed in the table for participating employers, which showed total member contributions for 2022 of 14.6% with just 11.5% going to providing for retirement. The top-line number in this case reduced by 1.4% for death benefits, 1.1% for disability benefits and 0.6% for operating costs. Sanlam noted that “overall, as the umbrella fund industry achieves economies of scale, the model seems to be working well for consumers”. 

The survey is based on an assessment of 83 principal officers of standalone funds, 100 participating employers in umbrella funds, 15 asset consultants, 15 healthcare consultants, 6 top umbrella fund sponsors and 500 online consumers. For 2022, the average umbrella fund membership at participating employers was 554, compared to 594 in 2021, with 55 of the participating employers having between 20 and 300 members. The average value invested in an umbrella fund by a participating employers was ZAR331 million compared to ZAR299 million, with 28 employers having ZAR50 million or less. 

Preservation more important than ever

The importance of your client preserving his or her retirement capital should be viewed in the context of thousands of South Africans saving too little towards retirement. In his contribution to the 2022 Benchmark, Danie van Zyl, Head: Smoothed Bonus Centre of Excellence at Sanlam Corporate, wrote that “National Treasury (NT), with prodding from the retirement industry, has made retirement reform a priority in recent years to help members achieve better financial outcomes in retirement; the aim is to encourage members to save more for retirement and use their savings to secure an income in retirement”. He added that the preservation of retirement fund benefits when members lose or change jobs was non-negotiable to achieve this, and that NT had proposed a two-pot retirement savings proposal to tackle the preservation. 

The proposal is to split a member’s future retirement savings into two pots, as follows. Pot one, a retirement pot, will ring-fence thirds of a member’s contributions to buy a monthly pension at retirement; this money will not be able to be touched until retirement, regardless of whether a member remains with or leaves the fund. Pot two will be referred to as an ‘access pot’ which will be accessible once per year for short-term financial relief. The 2022 Benchmark survey explored the two-pot proposal with the disclaimer that few in the industry thought it realistic to implement a two-pot solution by March 2023, as intended. 

Just over half of the fund members who took the poll were aware of the two-pot system. Of those, 56% said they did not agree with it, with a further 29% saying if the law was changed they would ‘definitely not’ access their retirement funds early. Another 20% of members said they would ‘probably not’ access the short-term financial relief pot. The good news is that almost two thirds of members indicated they would increase their retirement funding contributions if they could. “A lot of the responses in the consumer study suggest a more conservative and financially conscious South African has emerged from the COVID-19 pandemic,” said Kanyisa Mkhize, chief executive officer of Sanlam Corporate. 

Benefits of a successful retirement funding industry

There are two areas where retirement funds can have significant impact. First, the trillions in assets held by retirement funds on behalf of members have the potential to be invested for significant economic impact. A theme explored in the 2022 Benchmark survey was whether retirement fund trustees were ready to push more of their funds’ assets towards infrastructure projects, in line with the global trend of investing for impact and sustainability. This would require trustees to be comfortable with investing in alternative asset classes in private markets. There appears to be some appetite for this, given that 67% of standalone fund respondents and 53% of participating employers’ umbrella funds would consider such investments over the next three years. 

And second, at a member level, retirement funds can serve to improve health and wellness outcomes. According to Sanlam, 49% of employer funds and 53% of umbrella funds believe an integrated health and wellness programme delivers higher productivity and staff happiness, with 13 of the 15 healthcare brokers interviewed reporting that client priorities had changed in the past two years in terms of what they were looking for by way of healthcare solutions for their employees. 

“The retirement industry is in a strong position to impact the lives of South Africans as it is the largest source of invested assets in the country; we hope the 2022 survey findings will start the right conversations to ensure our industry can play a massive role in the country’s economic recovery and, ultimately, help kick-start growth,” concluded Mkhize. 

Writer’s thoughts:
Those formally employed and lucky enough to belong to a retirement fund appear well looked after by South Africa’s financial services sector. The problems in this shrinking section of the population include the failure to preserve retirement benefits and that retirement funding contributions are too low. Are you surprised that members of standalone funds, average 15.21%, are making higher retirement savings contributions than members of umbrella funds, average 11.57%, or is this an expected outcome? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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