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Not rocket science… Simple solutions for improved retirement outcomes

15 September 2022 Gareth Stokes

Education stands out as one of the top challenges facing employers, financial advisers and members participating in South Africa’s retirement benefits environment… More specifically, the challenge is how to improve understanding among members about how their benefits work and how they are progressing along their retirement journeys. “Employers, alongside service providers, have not done enough to ensure that members truly get to grips with their benefit entitlements [which contributes to members] being woefully short at the point of retirement or exit from the fund,” said Claire Mol, a retirement fund executive at KHUSA Consulting.

A whistle-stop overview of SA’s retirement funding landscape

Mol was first up during the “South African employee benefits landscape” panel discussion, held on day one of the 2022 Allan Gray Retirement Benefit Conference. She was joined by panel moderator, Richard Carter, Director at Allan Gray and fellow panellists Dr David McCarthy, from the University of Georgia; Lesego Mpete, a senior employee benefits consultant at Gradidge-Mahura Investments; and Louis van der Merwe, CFP® at WealthUp. The discussion set out to provide a whistle-stop overview of the country’s employee benefits landscape and the challenges affecting employers, financial advisers and members. 

The solution to the member communication problem begins with open and transparent communication. According to Mol, the retirement landscape would be in “a far better position overall” if service providers focused on producing appropriate and understandable messaging that was ‘digestible’ for both employers and members. The question immediately put to Mol by Carter was whether education could be seen as a ‘fix all’ for the industry’s poor outcomes. Her response: “Education creates accountability, and the more educated members and employers are insofar as the retirement benefits landscape, the more accountable service providers will have to be, and the more members will participate in mapping their own outcome”. 

Mpete agreed on the education issue; but added the cost of employee benefit solutions, especially in the small, medium and micro-enterprise (SMME) employer segment, as another area of concern. “It can be quite difficult for SMME employers to find suitable structures that will benefit them, and their employees, from a cost perspective,” she said. “From an employee benefit offerings perspective, employers also face the challenge of finding solutions that will assist their employees when they want to start up a retirement plan [as well as] assist employees with suitable retirement outcomes”. 

Cost of advice, compliance and product solutions

The costs associated with financial advice and financial products and the suitability of financial solutions have long occupied South Africa’s financial services regulators, with consumer behaviour also featuring strongly in the rationale given for their ongoing regulatory interventions. “The behaviour of individual members is a big part of the problem,” commented Van der Merwe, adding that certain of the regulator’s interventions, while aimed at addressing such behaviours, were actually “creating more complex systems [and introducing] more challenges for members”. Van der Merwe seemed to suggest that the ‘two pot’ retirement funding solution being driven by National Treasury (NT) could have an unintended behaviour-linked impact. 

Financial advisers, employee benefits consultants and employers already face an ongoing battle to assist employees with achieving sustainable retirement outcomes whilst making allowance for their immediate day-to-day, cost of living needs. And the ‘two pot’ legislation will make it easier for savers to access a portion of their retirement capital that would be better applied to creating income during retirement. Van der Merwe said that the regulation was adding complexity to an already complex system as well as inflating the compliance and compliance cost burden, with both outcomes taking the industry “in the wrong direction”. Would Dr McCarthy, who once advised National Treasury on tax and financial sector policy, agree? 

Shifting focus to impact and infrastructure

Unfortunately, the audience was left hanging, because Dr McCarthy chose to steer the discussion towards the role of the South African retirement funding sector in infrastructure investment. In this context, the challenge centres both on the role that the industry should play in addressing the country’s infrastructure backlog and the mechanisms through which such investments should be made. “National Treasury has changed regulation 28 to increase the amount of pension fund money that can be invested in infrastructure; but my plea to pension funds and regulators is that  pension fund investments should be listed rather than unlisted,” he said. His comment was, no doubt, directed at the cohort of fund managers that are advocating for retirement funds to invest in big ticket, unlisted, private market infrastructure opportunities. 

This preference for listed investments should not prevent retirement funds from achieving impact through their investing activities. “I would encourage pension funds to invest in listed securities [and] encourage infrastructure providers to list their securities to allow pension funds to invest in them,” explained Dr McCarthy. He added that infrastructure providers could use financial markets to create layers of protection for pension fund members, including through the price discovery provided by markets and the reduction in fraud and project risk, among others. The key observation during this part of the debate was that pension funds needed to invest in liquid assets due to the unpredictability of pension fund outflows, which flows would become more unpredictable in a ‘two pot’ environment. 

Are we over-selling member education?

Returning to the opening remarks, Carter asked the panellists whether the industry was over-selling the potential benefit of member education. “In a world free from restriction, it would be great to have some degree of financial hygiene taught in the schooling system, because that is where one builds the foundation in terms of people understanding their responsibility for their retirement outcome,” said Mol. Armed with this information, individuals would be more likely to participate in retirement structures once they are gainfully employed. Van der Merwe countered that education would not ‘win the day’ without significant changes to members’ behaviours through, for example, sensible tweaks to default fund choices. 

“It is not as simple as educating members about their benefits; the conversation has to start with the basics of financial literacy,” said Mpete. The key ingredients for success in this area include a clear understanding of each member’s financial literacy and knowing where that member is on his or her overall retirement savings journey. “Sometimes we are so focused on progressing members towards a suitable retirement outcome that we forget to consider where they are currently,” she concluded. 

Writer’s thoughts:
It seems that costs, member behaviour and member education all have a role to play in South Africa’s poor financial outcomes. The question, just one of many inspired by today’s newsletter, is how to address these shortcomings? I would love to hear from EB consultants and financial advisers about what you believe the greatest obstacle to improved retirement funding outcomes is? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Cynical Simon, 15 Sep 2022
Poor and erratic performance of listed investment vehicles, added to the "fixed contribution scam", all added to the absence of accountability on the part of the investment funds and investment vehicles, which created a world where the employee at time of retirement is left to fend for himself .
All this fuss about educating the illiterate employee , is just a ploy to hide the sick and fatally flawed economic system set on the idiotic idea that contribution money of employees should be further put to ill-use for social upliftment ,which projects further drain the employees resources and cause the evaporation of his retirement dream.
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