Preserve or bust!
The ‘big picture’ statistic in the retirement fund space has remained unaltered since we started reporting on the industry in 2007. Only six percent of South Africans will be able to extend the living standard enjoyed during their last working years into retirement. The balance will have to make significant adjustments to ensure their pension nest eggs outlast them. To find out more about the state of South Africa’s retirement fund industry we attended a recent media presentation covering Old Mutual’s Retirement Funds Survey 2010.
Data for Old Mutual’s survey is collected by means of an independently administered structured questionnaire. The 2010 survey attracted comment from a variety of industry stakeholders, including representatives of retirement funds (71), employers participating in umbrella funds (35), intermediaries (17) and media and regulatory bodies (7). The 2010 survey is of particular relevance because of major trend-shifts among retirement fund members. “Thousands of people have been forced to delay retirement, or re-assess their retirement plans as a direct result of the recent recession,” said Seelan Gobalsamy, managing director at Old Mutual Corporate.
Do as I say – not as I do!
One of the survey objectives was to test attitudes and requirements among industry stakeholders with regard to retirement fund preservation. The most shocking statistic from the Retirement Funds Survey 2010 is not included in the neatly bound ‘key findings’ brochure. Instead, journalists listened in awe as Mkuseli Mbomvu, service executive at Old Mutual Corporate, recited statistics from the 2009 umbrella funds industry. A massive 99% of the 17 272 people who resigned from umbrella funds last year took opted for cash over preservation! Only 170 members preserved their retirement savings.
Everyone knows what they should do, but are either unprepared for the short-term sacrifice, or simply unable to get by without the extra cash. Old Mutual notes: “While 93% of stakeholders surveyed agree that preserving retirement savings is important when exiting their existing pension or provident fund, the majority of South Africans are not doing so!” Against this backdrop it’s not surprising government is considering some form of compulsory preservation in its retirement fund reforms.
The survey confirms overwhelming support for compulsory preservation, with respondents in each stakeholder category strongly in favour of both compulsory preservation and annuitisation, with minor conditions. Respondents in favour of compulsory preservation said members should be able to choose the service provider, while those in favour of annuitisation wanted access to cash in the event of financial emergencies.
Reasons for the preservation problem
There are numerous factors influencing the ‘preserve or not’ decision. Survey respondents believed fund members would preserve funds if advised to do so by financial advisers, family or friends. Fund members with higher levels of financial awareness – through education – are also more likely to preserve funds upon withdrawal. Reference was also made to the huge influence human resources departments have on decisions to remain invested.
Why do members prefer NOT to preserve? Old Mutual says the desire to access cash, high awareness of the cash payout option and lack of understanding of the consequences of such decisions are among the contributing factors. South Africa shed 900 000 jobs through 2009, with many new jobless already under severe financial stress. To these individuals the cash payment on their pension or provident fund withdrawal is a godsend. Others believe they can use the payout to fund their own small business venture. Mbomvu refers to the ‘Triple-T’ syndrome – the desire to use pension fund payouts to purchase Taxis, Taverns and Tuck-shops – as one reason for poor preservation. Although the entrepreneurial flair is commendable, much of this cash is diverted to non-capital pursuits. And with the number of small business failures a start-up is hardly a suitable vehicle for retirement savings.
There are many ways to address the preservation problem. The simplest we’ve heard to date is to simply redesign the pension funds withdrawal form. If the cash option is displayed less prominently on the form, members wouldn’t opt for it by default. Another solution is to increase education around the importance of preservation, and the alternatives to withdrawing cash.
Trustees should take responsibility
Financial advisers and human resources departments shouldn’t shoulder the responsibility for retirement planning alone. Gobalsamy says it is also the responsibility of retirement fund trustees to provide members with pre-retirement counselling or financial advice to keep their retirement fund savings invested for as long as possible.
Editor’s thoughts: Pension fund surveys are useful in assessing segments of the pension funds space. But despite their best efforts pension funds, trustees, financial advisers, employers and human resources departments aren’t getting the message to individual members. Clearly the biggest challenge facing the industry is to encourage individual savers to take greater responsibility for their own retirement outcome. Do you think South Africans take enough interest in their retirement plans? Add your comments below, or send them to [email protected]
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