Finding solutions to flawed systems

One of the biggest problems with the retirement industry is that we are expecting a system that was established 40 years ago to be relevant today. This was the main message from Philip Bradford, President of CFA South Africa, who was addressing the media on what has been a significant area of focus over the past two years.

Why is there so much focus on the problems and challenges with the retirement industry? Well, if you know your problems, you will know how to solve them. 

Local challenges

“The South African retirement system is a broken system. There is an inherent dichotomy in the system where private funds work well for people on the upper end of the spectrum while there is little protection for people who are on the lower end of the earning spectrum,” said Bradford.

Bradford added that when addressing the industry’s challenges, countries need to take into account their own circumstances which includes economic considerations, the cultural dynamics of society, the political climate of the country, historical events which have defined the country and finally, internationally based capital markets. 

This is perhaps voicing the concern that South Africa can at times be quick to adopt international trends and adopt them into the local market without any adaption. However, Bradford went on to add that the best retirement systems in the world have high coverage in a private system, have mandatory contribution rates of at least 8% of earnings and have funded assets for the future greater than 100% of the country’s gross domestic product (GDP). 

Culture shock

Perhaps the biggest hurdle we need to overcome as a country is the fact that there is a severe lack of savings culture. Speaking at the same event as Bradford, Wouter Fourie CFP, Financial Planner of the Year 2015, says that credit and debt is South Africa’s biggest problem. 

“According to a recent study, South Africans are the biggest borrowers in the world. Society makes it easy for the public to get credit. Companies glorify this fact by saying that you are credit worthy as opposed to debt worthy because being credit worthy sounds more appealing. At the end of the day, there is no difference between credit and debt,” said Fourie. 

Fourie is also a Director at Ascor, an independent wealth management company operating within the financial services industry, and through his conversations with clients, it is very clear that South Africans simply cannot save because they are deeply bound by debt. There is no room for saving. 

This view was backed up by Bradford who went on to describe the country’s lack of savings culture as an endemic cultural battle. “In the heydays of 2000, when the country experienced good GDP growth, a report showed that over 60% of the country’s GDP was made up of consumer spending. The problem is that a society cannot spend itself rich,” said Bradford. 

A workable solution

Bradford says that there is a way to fix our current situation and has pointed towards certain steps that might help to achieve this:

- The industry needs clear objectives for the whole retirement system, including the complementary roles of each pillar of income or financial support;

- A minimum level of funding should be made into a pension system for all workers with contributions by employers, employees and the self-employed;

- Retirement vehicles should be cost-effective and include attractive default arrangements before and after retirement;

- Administration and investment costs should be disclosed with some competition present to encourage fair pricing; and

- Flexibility needs to be inherent as individuals’ personal and financial circumstances vary, and retirement will occur at different ages and in different ways across the population. 

Calibrating towards true north

So how do we fix this? The situation is not unresolvable, it will just taker a lot of time and effort to resolve it. 

Fourie added that there are certain elements the retirement industry can adopt in order to address these challenges. The first element is budgeting, this is where the role of the adviser will stand out as the champion of society and may be its trump card in desperate times. As Fourie puts it, if you have a budget you will not spend more than you earn. 

The second element is enforced savings. If society is forced to save, they will have something to fall back on in times of need and won’t need to rely on credit. Another important element is education, we need to introduce education around money matters at school level where they will learn about the benefits of compound interest and the need to start saving for retirement as soon as a working career blossoms. 

The third element is linked to the education element because Fourie believes there needs to be a discussion in society about the situation we are currently in and how we can move past it. 

The last element is that the country needs to embrace entrepreneurship. And this goes beyond sitting and waiting for government to suddenly start supporting small business development and growth. We cannot be a nanny state. The reason people join private pension funds is because they don’t want to be beholden to the state; entrepreneurs should follow the same mantra. 

Editor’s Thoughts:
Many countries have had to deal with flawed retirement systems, and have significantly turned the tables in favour of the greater population. Governments Retirement Reform Programme will help in this, but we cannot be a nanny state and expect everything to fall on our laps on a silver platter. I would like to hear your thoughts. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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