Forcing people’s actions will be met with significant opposition

We are living longer and are in retirement for longer, but our money is losing its value – is this a conundrum?

FAnews spoke to Sheldon Friedericksen, General Manager of Group Benefits at Fedgroup about this, whether it’s time for a new innovative approach to retirement and more.

A tricky space for retirement funding

According to Friedericksen, we find ourselves in a tricky space for retirement funding, globally. “With improved access to health care, higher hygiene standards, and healthier lifestyles, the average global life expectancy, according to the World Health Organisation (WHO), has increased between 2000 and 2019 from 68.8 years to 73.4 years. As a result, the cost of retirement or the amount of money required for a financially fit retirement is increasing, requiring governments, retirement providers and employers to rethink their policies. This is a hot topic in many jurisdictions around the world, with the most vocal being in France.”

“As South Africans, we have multiple retirement concerns such as high inflation, low economic growth over the past decade, and limited real returns on assets invested through retirement vehicles as a result. The old rules of thumbs no longer apply. Contributing 15% of your salary into a tax-efficient retirement vehicle monthly from the age of 25 to 65 may not result in a financially fit retirement. They say that the first generation to consistently live beyond 100 has already been born, meaning that we need to think beyond the traditional retirement principles to what changes can be made now to ensure our future,” emphasised Friedericksen.

While these statistics are frightening, he said this is a conundrum that can be defeated. “There is no replacement for consistent savings in a diversified portfolio that generates real returns on a regular basis and compounds into the future. This remains a basic building block for a financially fit retirement. A retirement fund is a great tax-efficient way to accumulate wealth for an individual’s future, but it is obviously just one investment vehicle. Regardless of the person’s life and investment goals, the financial plan he or she’s registered financial adviser helped him or her to create, or the investment vehicle they use, saving for the future is likely to be a requirement,” he said.

As life expectancy increases and employees can maintain their standards of work performance longer, Friedericksen said employers will likely start to engage in discussions to increase the general retirement age. This will enable people to save towards retirement for a few more years while reducing the potential cost of retirement when they eventually stop working. However, this could come with the unintended consequence of increasing unemployment. As fewer people leave the workforce due to retirement, the employment life cycle machine could stall.

The Two-Pot System

When asked about his thoughts on the two-pot system, Friedericksen said the Two-Pot System doesn’t have a big impact on retirement investments. “These are long-term investments that should be made solely for an individual’s future and generating a sufficient lump-sum that will be able to generate an income stream post-retirement that will enable him or her to maintain a financially fit retirement lifestyle.” 

“So, a savings pot doesn’t mean anything in this definition. However, the problem we have in South Africa is one of a poor general savings culture, let alone saving towards retirement. There are noticeable behaviours within the retirement industry that have seen many investors requiring access to their retirement funds upon resignation or termination from employment to repay debts or sustain their current lifestyles. The changes the Two-Pot System is implementing uses a retirement vehicle that is often compulsory from an employer, to enforce some form of savings. The two pots will separate the longer-term savings pot meant to be accessed only upon retirement, i.e., creating a ‘forced’ preservation of these savings for a person’s future, and the shorter-term savings pot, that can be accessed should the need arise due to the occurrence of an unforeseen life event. The objective of this is twofold: to encourage further saving towards a person’s future knowing that he or she will have some access to the funds should he or she require and limiting this access to only a portion of the person’s benefit, ensuring that he or she will have some savings upon his or her future retirement date,” he continued. 

Retirement systems in the world

The Netherlands has a pension system that is consistently ranked as one of the best in the world. It is a three-pillar system that includes a mandatory state pension, employer-sponsored pensions, and individual savings accounts. Denmark has a universal, publicly funded pension system that provides a basic income to all citizens in retirement. It is supplemented by employer-sponsored pensions and individual savings accounts. Switzerland has a mandatory, employer-sponsored pension system that is supplemented by individual savings accounts. What lessons can South Africa learn? 

“Comparing the best retirement systems in the world to obtain insight into what South Africa can do is great, however, needs to be considered in the landscape of South Africa. We have very high unemployment, a very unequal society, and are being ranked very low on the global corruption/trust index. But the golden thread that we can take from these international retirement systems is the drive for savings, often through a mandatory requirement. As mentioned above, the most important aspect is to save, irrespective of the vehicle. However, South Africa has many challenges in this regard. Some of these have been seen in respect to the challenges already made against the legislative changes around forced preservation of retirement benefits. The current failure of many state-owned enterprises (SAA, Post Office, Post Bank, etc.) and the corruption that has been exposed, makes it difficult for any move to a state-owned retirement vehicle being made mandatory in South Africa,” he added.

Until other aspects within South Africa are solved, Friedericksen said anything that resembles the state, forcing people’s actions, etc. will, in my view, be met with significant opposition until such time as the base foundational aspects of society are seen to be improving. “However, the private sector, in collaboration with the state, could create a framework built on the trust of private financial institutions. This, combined with further savings incentives for individuals and incentives to invest in certain key projects, could be implemented to grow the savings of South Africans, with the guidance of investments into secure investments that deliver on key infrastructure and societal projects that are required for the ongoing sustainability and growth of South Africa,” he continued.

A final word…

The world has changed dramatically over my lifetime, but the only noticeable change to retirement savings was a passing of the retirement obligations from specialist defined benefit retirement funds that used to promise certainty of a retirement outcome in return for a person’s monthly contributions, to the investor. 

“Investors are now required to save as much as they can afford, building up a lump sum that will hopefully be enough to cover their retirement obligations until these would not be required anymore. During this time, more globalisation has occurred, and lately, more people are working differently, being digital nomads, etc. Financial providers’ products and their advisers need to think differently to cater for the needs of their clients. In the South African context, we need to rethink how we create an economy that incentivises and rewards savings. We need funding to be allocated with certainty, predictability, and the knowledge that capital with an adequate financial return will be generated and paid to investors. This can only be achieved in an environment of trust, supported by measurements and transparency,” he stated. 

“Individuals will also need to look at the methods in which they can continue to generate some form of income throughout their lives. As we live longer, it is predicted that we will have more frequent career changes during our lives, sometimes switching focus from one profession to another completely. As such, the question is: how savings vehicles can enable individuals to live their lives the way they want to but still provide them with the support of tracking their financial goals and ensuring they secure a financially fit retirement, while still enjoying themselves?” He concluded. 

Writer’s thoughts

As mentioned above, the most important aspect is to save, irrespective of the vehicle. However, South Africa has many challenges in this regard. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me - [email protected]

Comment on this Post

Name*

Email Address*

Comment*

 

Submit Comment