Hands on approach required to help South Africans Retire comfortably

Given the rate at which South Africans switch jobs and hence the number of times they get the opportunity to cash in their pension payouts few South Africans manage to maintain their standard of living into retirement.

Legislation is being proposed to make the preservation of retirement savings compulsory and this is expected to improve matters considerably over time. However, even once this legislation is introduced there will still be many decisions that members will need to be helped to get right if they are to achieve their retirement objectives. For example, how much to save, how much to contribute towards other benefits, what investment strategy to adopt, what annuity to take at retirement etc.

As such, “trustees, employers and management committees should provide education and guidance to help members make decisions that will ensure that they maintain their standard of living after they retire” says John Anderson, Alexander Forbes Financial Services (Pty) Limited.

Since effective communication with fund members is key to educating members there is an increasing realisation within the industry that member communication needs to be more targeted to ensure that members get the right advice - and take the right action where necessary.

Targeted communication is about giving people information that they will pay attention to because it helps determine their real retirement outcomes. “Employers and trustees should use targeted communications to try to influence the behaviour of members who appear to be making mistakes” says Anderson.

Examples of targeted communication include:

· Annual projection statements showing whether members are on track in terms of their net replacement ratios (NRR) - or the members’ likelihood of maintaining their standard of living post retirement. Statements should also show how much more still needs to be contributed or the level at which the member is likely to retire based on current contributions.

· Annual death needs-analysis showing the level of death benefits provided to the fund benchmarked to provide a sufficient income for dependents.

· Communication to members who are expected to have a NRR shortfall.

· Communication to members who are expected to have a shortfall of death or disability benefits relative to a reasonable benchmark.

· Communication to members leaving a fund demonstrating the consequences of non-preservation and the impact of various investment strategies based on the individual’s actual information and circumstances.

· Communication ahead of retirement showing various likely pensions based on different, though actual, quotations from the market calculated on the individual’s own information.

· Retirement seminars prior to retirement.

· Communication to those members who choose an inappropriate investment option. For example, young members who have opted for cash or members who appear to be monitoring market movements and timing their exit from one portfolio and their entry into another portfolio based on these movements.

Yet getting the communication right is only the first step in the broader effort to educate individual fund members on the importance of taking an outcomes-based approach to their retirement planning.

There is a clear trend internationally that is seeing employers and funds increasingly taking member behaviour into account in their governance and decision-making processes. Beyond just communicating, outcomes are nowadays also measured “with the success of interventions tested and amended to improve their effectiveness where necessary” says Anderson.

A key ingredient of good outcomes based governance is structured educational programmes designed to enhance the financial capability of individuals to achieve NRR upon retirement. As such, communication and education alone are not alone sufficient to ensure that members make appropriate decisions. This is evident by the fact that members’ NRR achieved over the last few years continue to be impacted by poor retirement decisions – in spite of an increase in communication and education.

Instead, the provision of financial advice needs to become an important component of any organisation’s outcomes-based governance approach. This advice can range from:

· Encouraging members to obtain advice. That said, this passive approach, more closely aligned to education, has shown itself to have limited success in improving retirement outcomes.

· Allowing financial advisors to consult members at their place of work prior to retirement and exit from the fund. This more hands-on approach has been shown to be more effective.

· The fund or employer contracting with a financial planning institution to provide members with guidance. This is a very pro-active approach in which a financial planning institution is contracted on a group basis to provide advice to individuals. A monitored service level agreement is put in place with appointments reviewed from time to time in line with the governance processes applied by funds and employers.

In this way as individuals gain more knowledge they can be given more control and responsibility as their decision-making ability improves through communication, education and, most importantly, face to face and hands-on guidance.

“Examining how individuals make choices and what can be done to help them make better choices about retirement provision is at the heart of our outcomes-based approach and is likely to remain an important area of further research” concludes Anderson.