Old Mutual Retirement Fund Survey indicates that funds need more communication about proposed pension reforms
Findings of the 2008 Old Mutual Retirement Fund Survey highlight the need for government and industry players to provide ongoing clarity on the planned retirement reforms aimed at addressing the low retirement savings position of many South Africans.
26% of survey respondents are generally positive towards the reforms. However, the uncertainty around the details of the proposed reforms is one of the key reasons why 53% of those surveyed have mixed feelings towards the proposed reforms, says David O’Brien, who heads up the Old Mutual Retirement Fund Reform team.
48% of the funds surveyed are aware of most of the proposals and 44% claim to be aware of only some of these proposals or are hardly aware of the proposals at all. 9 of the 22 employers in the Umbrella Funds surveyed feel that they know very little about the proposals or consider themselves not very well informed.
As a result, there is speculation regarding the actual implications of the proposals. Due to the current uncertainty, funds and members are largely unable to plan effectively for the future. David O’Brien says that financial service providers have a mutual responsibility with government to assist South Africans understand the implications of the reforms. He urges funds and consultants in the retirement funding industry, to continue to play a key role in keeping employers informed regarding developments as the reforms unfolds.
93% of funds feel that members of employer funds should be able to opt out of the national fund and choose their own retirement fund service providers. This aspect of the proposals appears to be gaining favour, but may be subject to funds being able to meet set standards.
O’Brien thinks that the lack of clarity and certainty is mostly as a result of it being still too early in the process to fully understand the full implications of the proposed retirement reforms. “One thing is certain: The retirement fund landscape will be changing significantly in the future. We are still awaiting a communication from the government Inter Departmental Task Team later this year which will provide more clarity on the proposals”.
“In general, we believe that all South Africans should welcome these reforms as they focus on providing adequate income benefits to members in retirement, propose measures to contain the leakage and wastage of retirement savings, bring about good governance of member funds and encourage South Africans to save for retirement.”
Current statistics clearly reflect the need for changes to the current system. Household savings are now estimated at 0.01% of disposable income in South Africa, while approximately only six percent of South Africans can maintain their standard of living when they retire.
O’Brien says that a key reason for this situation is the ability of employees to access retirement benefits prior to retirement age. With statistics pointing towards the likelihood that up to 90% of people exiting their retirement funds in South Africa do not preserve their retirement funds, the issue of preservation is clearly an important one within the industry.
9 of the 10 intermediaries surveyed are in favour of compulsory preservation (7 strongly) and 7 are already recommending that clients encourage exiting members to preserve. Two say they will do so in future.
40% of employer fund respondents claim they are already taking steps to encourage preservation among exiting members and a further 22% indicate that they plan to do so - before government legislation enforces preservation.
“One of the chief reasons that South Africans have inadequate savings at retirement is that they do not preserve their retirement savings when changing jobs. Compound interest on savings is especially evident in the last few years before retirement, so the longer that South Africans remain invested in a retirement savings vehicle, the more money they will have when they retire.”
O’Brien says that it is crucial that South Africans continue saving for retirement, while the reform unfolds. “There is no sense in delaying savings in anticipation of the new legislation. This is particularly true for people who currently do not have a retirement savings plan”.
He says it is also important for South Africans to consult with an accredited financial advisor on a regular basis to ensure that they are making sufficient provision for their future retirement and other financial needs.
O’Brien says the proposed changes are likely to be of benefit all South Africans and the local economy as a whole.
