Government’s ongoing battle with retirement reform
Many articles have been written about the challenges the South African retirement industry currently faces. Government is aware of these and is in the process of devising, and eventually implementing, a series of legislative pieces which will work towards retirement reform.
This has been met by stern resistance in some sectors of society. One thing government wants to resolvethrough forced preservation, is the issue of workers withdrawing their retirement savings and not resaving it. Trade Unions are not happy with the thought of forced preservation, and we have seen that government is reluctant to oppose them.
Another issue which may also generate resistance is compulsory retirement contributions. This has been a matter of concern for some time as a number of working class South Africans simply cannot afford to contribute towards a retirement fund.
The gathering storm
According to an Old Mutual Corporate Auto Enrolment Research Report, this number of working class people, who currently donot have a pension or provident fund, are divided on whether a Government-sponsored pension fund should be compulsory or not.
Craig Aitchison, General Manager Corporate Customer Solutions, at Old Mutual Corporate says, “Government has committed to promoting efficient savings by introducing retirement reforms that will encourage employees to save and provide adequately for their retirement. This is being done while also encouraging employers to provide retirement saving plans to their employees as part of their employment contracts.”
Division on government sponsored plan
One proposed solution is to introduce legislation that will make it compulsory for every employee who does not currently belong to a pension fund, to belong to a government-sponsored pension fund.
The survey revealed that 51% of the respondents believed employees should not be allowed to opt out of such a fund, while 49% indicated they should be able to.
“55% of the respondents who selected the opt-out option are mainly driven by the principle of having the right to choose, while 18% of the results followed by a concern that they might not be able to afford the contribution due to limited monthly income. In comparison, only 8% cited a lack of trust in government. It is encouraging that this is not seen as a leading reason for why respondents should be allowed to opt out of the fund,” says Aitchison.
He adds that while the respondents were evenly split on whether they would want to opt out or not, two in three said they would be likely to join such a fund if it was introduced. This suggests that South Africans do see the benefits of being part of such a fund.
This then puts the responsibility of investing solely on the shoulders of the public as employers may not be keen to contribute to this fund. Countries which do have a significant population of comfortable retirees have systems which include significant government support. These systems are examples that South Africa should be working towards, but will government be able to offer financial support on the same level that the US, UK and Australian governments can offer?
Employer solution preferred…with some apathy
One of the most plausible options in South Africa would be an employer sponsored fund. This however, can prove to be difficult in some instances where the company is small and the costs of running a company sponsored retirement fund would be very burdensome.
There is also some level of apathy shown towards this solution. The survey showed that the respondents were also divided when asked how they felt about the idea of the implementation of an employer sponsored pension fund. A significant 67% indicated they liked it either very much or partially.
When asked which fund they would more likely join, assuming the benefits are the same for both, 49% of the respondents selected an employer-sponsored pension fund, while only 15% chose the government-sponsored fund.
“We believe this choice is influenced by people wanting to participate in the investment decision-making process, and consumers may feel they are less able to influence a government sponsored fund than an employer sponsored fund,” continues Aitchison.
Not to mention the growing middle class in South Africa who are becoming more educated on issues that are key to the financial services industry. Through this education process, they realise that variety is the spice of life and that advisers should ideally be offering a range of options. In this way, they feel in control of their investments and are able to engage with their advisers on personal levels as to when they want to change their investment strategies or their portfolio makeups.
Cash injections are needed and welcome
When the respondents were surveyed on the things they would do differently to make them feel more secure and satisfied when they retire, 43% of them said that they would increase their monthly savings contributions. However, with the current pressure on household incomes, some of the respondents said they would find it difficult to put extra money aside for retirement savings.
“While one third of the respondents said they should be contributing more than 15% of their salary to a pension fund, only 10% of them felt they are in a financial position to make this commitment.
In short, these findings corroborate that some of the respondents do take action to increase their retirement savings, but many do not and are concerned about their ability to save for retirement,” says Aitchison. “Therefore, Government should act to create a retirement saving system that encourages all employees to save for retirement, and offers them employer sponsored plans with some form of decision making participation in terms of fund offerings, as well as an opt-out option,” concludes Aitchison.
Editor’s Thoughts:
This is a complex issue. Government’s desire to implement retirement reform is noble, but is being met with some resistance. A middle ground needs to be found where both government and the public agree to key changes. You can please some people sometimes, but you cannot please all of the people all of the time. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
