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Reality check

23 November 2020 Gareth Stokes

Half of South Africans do not have a retirement plan, and only a quarter of those who do say they have a “pretty good idea” of how they are tracking to this plan. Of greater concern is that more than 60% of employees who are part of a formal employer-sponsored retirement fund arrangement know little about the fund they are members of. These staggering admissions emerged during the launch of the 10X Investments Retirement Reality Report 2020. The third edition of the annual report shows a slight decline in awareness among struggling retirement savers.

What is a ‘retirement plan’

Some context is indicated before we explore the report findings. To begin with, ‘retirement plan’ is defined as “a considered and documented savings and investment strategy that will enable savers to accumulate enough money by the time they retire to maintain their standard of living in retirement”. The report is based on findings by the 2020 Brand Atlas Survey, which tracks and measures the lifestyles of some 15.1 million economically active South Africans, who live in households where income exceeds R8 000 per month. And finally, data used in the report is weighted to align with the Unisa Bureau of Marketing Research’s 2019 Household Income and Expenditure Report. In layperson’s terms: There is plenty of number crunching taking place behind the scenes. 

The report was presented under the oft-repeated National Treasury statistic that only 6% of the country’s citizens will be able to maintain their pre-retirement living standards in retirement. This number drew criticism from some of the journalists in attendance, who observed that the 6 in 100 ‘mis-alignment’ had been trotted out at every retirement funding seminar going back two decades. It is certainly concerning given that almost 60% of the retirement savers who make up the survey have been part of a formal retirement funding structure. Mica Townsend, Business Development Manager at 10X Investments, said that South Africa’s retirement funding outcomes were disappointing given the high proportion of respondents who had been, or were presently, members of corporate employee funds. “Why are so many people barely getting by in retirement when more than 60% of survey respondents had participated in corporate schemes?” she asked. 

A severe accountability deficit

We could offer some insights by unpacking respondents’ answers to two of the survey questions. The first being: Have you ever been part of a corporate retirement savings scheme? It emerges that 43% had never been part of a formal structure versus the 36% who were contributing members at the time the survey was conducted. Some of the 43% may be contributing to self-funded retirement annuities or other discretionary savings vehicles; but it is fair to assume that most in this category will have to turn to their family and friends, or the state, to carry them through retirement. Of the remaining respondents 4% said they had been members but had since retired; 7% said they had been members but left the company and preserved their savings; and 11% indicated they had been members but cashed out when they left. 

The second question focused on the level of knowledge that respondents had about their corporate retirement saving scheme. “People know that they are members of these funds; but know little about them,” said Townsend. Only 40% said they had a good understanding of the scheme versus 14% who said they had “no idea” and 11% who said they were not really interested in knowing more. This ‘shrug of the shoulders’ attitude is common among South African savers and investors and suggests that individuals be made more accountable for their financial futures. “The less engaged you are, the less likely you will be to achieve your outcomes,” warned Townsend. 

Preservation remains the dealbreaker

Chris Brits, CEO of EBNet, suggested that many of the ‘improvements’ made to the retirement savings industry over the years had negative consequences for retirement savers. “We have seen the migration from Defined Benefits to Defined Contributions; the introduction of investment choice; trustee representation; and plenty of legislation,” he said, before adding that each of these changes added costs to the system, which filtered down to members. But the real deal breaker, according to 10X Investments, stems from fund members’ inability to preserve their savings when existing a fund. “When people leave their employers, they simply cash in their funds,” said Townsend, before sharing an example that illustrated the negative effect of withdrawing from a fund. 

FAnews readers, who understand the magic of compounding, hardly need additional motivation to encourage their clients to preserve; but we share the example anyway. Jane and John start working at age 25 and continue working until age 65. They earn the same annual salaries and make the same contributions to retirement funds throughout. At age 35 John moves from one job to another and decides to withdraw and spend his accumulated retirement capital of R144 000. He then begins saving from scratch in his new employer’s fund. By age 65 John’s ‘retirement pot’ has grown to R673 000 compared to Jane’s R1.140 million. And we have not even mentioned that the South African Revenue Services (SARS) taxed John R24 420 on his withdrawal! 

What could a sensible regulator do?

Consumer journalist, Maya Fisher-French, observed that consumers did not always play ‘fast and loose’ with the withdrawn amount. “People often take the cash to settle debt,” she said. The challenge is to educate consumers about the trade-off they are making because, although apparently sensible, the long term outcome of an early withdrawal to settle debt is much poorer than preserving. “Cashing out retirement savings when changing jobs is one of the classic retirement-saving mistakes,” notes the report. “Cashing out means starting again from the beginning and, far more damaging, losing out on the compound growth on those early savings, which, over periods of 20 or more years, usually makes up the larger portion of accumulated savings”. 

And this got us thinking. Since preservation is the biggest problem, why not regulate that each employer or retirement fund completes a mandatory face-to-face advice session with each and every employer before being allowed to make the withdrawal payment? This would certainly create opportunities for the financial planning community to establish relationships with clients early on, and hopefully convert these early interactions into a future wealth planning opportunity. 

Writer’s thoughts:
Lead generation remains one of the biggest challenges to financial advisers and financial planners. Regulation that encourages early interactions between adviser and potential client would surely be a welcome way of raising awareness of the value of long term financial planning. Would you be prepared to give pro bono advice on preservation to improve retirement outcomes? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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