Old Mutual Retirement Fund Survey reveals key insights into local retirement industry

Old Mutual Corporate released the findings of the 2008 Old Mutual Retirement Funds Survey. The survey provides key insights into the way in which retirement funds are managing their retirement assets and liabilities and dealing with an increasingly legislated retirement funding environment in the face of far-reaching government reform proposals.

According to Seelan Gobalsamy, Executive General Manager of Old Mutual Corporate, the survey findings reveal a number of key emerging trends and confirmation of some previously identified trends within the retirement funding industry:

Communication and understanding
Despite considerable expenditure by funds o¬n communication, the survey reveals that members still feel appropriate communication is lacking, as information provided is not being communicated suitably.

“Information is typically provided in written format, but members feel this lacks relevance and they still don’t understand the basics of retirement funds,” says Gobalsamy. “Verbal delivery of information and education is regarded as more meaningful and effective for some.”

The tendency for funds to focus on written communication is evident from the survey findings. For example, while 91% of funds provide some form of communication to new members joining the fund, less than half of funds use group presentations or workshops and o¬nly 32% offer one on one counselling. on the other hand, 98% of funds make use information booklets and 30% provide members with online information. In addition, where pre-retirement counselling is provided, this is typically only offered within a year of retirement. “This is too late”, adds Gobalsamy.

He says a lack of financial education among members remains a key barrier to effective retirement planning.

Governance
According to the survey, while there are signs that fund governance is improving, respondents agree that the process is incurring additional costs for funds. Gobalsamy says that it is encouraging to see that the majority of funds are already adhering to the guidelines set out in PF130. He adds that while the principal shortfall remains a lack of formal trustee assessment tools with only 38% of funds interviewed currently using such tools, 80% of funds believe their trustees are already ‘very’ or ‘reasonably well equipped’ to perform their fiduciary duties.

Umbrella Funds
The survey reveals that there has been considerable growth in Umbrella Funds in recent years as employers seek to shed trusteeship responsibility in an increasingly legislated industry, while also attempting to reduce costs. This has been promoted, to some extent, by intermediaries where they felt it appropriate. This growth is expected to continue over the next 2 to 3 years.
The research shows an increase in the number of companies with large workforces participating in Umbrella Funds. Previously, employers offering Umbrella Funds have typically been those with a workforce of less than 100 (usually less than 50). This survey saw participation by employers with more than 500 employees.

“Umbrella Funds appear to be successfully addressing some of the previous criticisms leveled at them and have become more flexible for employers and members,” says Gobalsamy. “This is backed up by the vast majority of employers who have joined Umbrella Fund arrangements saying they are very satisfied with these funds.”

He adds that if the proposed National Social Security Scheme (NSSS) becomes a reality, the growth in Umbrella Funds is likely to gain further momentum as employer-based fund memberships shrink, costs rise and stand-alone funds become unsustainable.

Investments
Gobalsamy comments that while funds have enjoyed good returns o¬n their investments in recent years, the economic tide is turning and the downside risk of investment market volatility has increased, interest rates are rising, and the cost of providing benefits is on the rise.

“It is therefore not surprising that multi-manager and smoothed bonus products are already popular as they spread risk and aim for long term consistent returns. Absolute return and smoothed bonus products may gain further favour in difficult market conditions.”

Results from the survey show that 6 out of 10 funds see room for smoothed bonus products in a life-stage portfolio, while 40% of funds interviewed are willing to pay a premium for capital guarantees.

It also reveals that interest in offshore investments will increase as a result of the further relaxation of exchange controls, but 40% of those interviewed are unsure whether they will place more assets offshore.

Costs
Over the past ten years, the industry has seen an escalation in the cost of risk benefits due to the impact of HIV/AIDS. As a result, a number of funds have applied caps to contain the cost of risk benefits (22% according to the 2008 survey), above which they would have to apply a reduction in benefits or call on the employer to subsidize the cost of benefits.

Gobalsamy says it is therefore encouraging to see that the growth in the cost of claims has levelled off over the past two years, with 83% of funds included in the survey experiencing either an unchanged or decreased level of risk costs. “For members of funds, this means that there is a lesser likelihood that their regular net savings towards retirement will be reduced any further than it already has. For Trustees, it means they must continue to review their risk policy statements, re-evaluating risk contribution caps that might have been revised upwards in the recent past.”

He says nevertheless, the rise in the cost of risk benefits over the last decade, coupled with an increased investment in member communication and fund governance has put pressure o¬n retirement funds to ensure that the bulk of member contributions are allocated to retirement savings.

Retirement Reform
26% of survey respondents are generally positive towards the reforms. However, the uncertainty around the details of the proposed reforms is o¬ne of the key reasons why 53% of those surveyed have mixed feelings towards the proposed reforms.

Furthermore, 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.

With more than 90% of funds and intermediaries in favour of opting out, there is broad consensus that members of private sector funds should be allowed the freedom of choice to opt out of the national fund if they so wish.

Compulsory preservation also receives strong support from members and intermediaries, with many funds planning to do more on preservation, even before legislation forces action.

Gobalsamy says saving is crucial for our nation. It is critical of all South Africans to continue to save and plan for their financial well being and not wait for the reforms.

This year’s survey results were gleaned from almost a hundred hours of interviewing with fund representatives, intermediaries and members, and are the result of in-depth, independent analysis.