Retirement savings should be enforced

Relying solely on individuals to discipline themselves to save for retirement is unrealistic. Employers, and government will therefore have to play their part in enforcing savings, says Marius Fenwick, Chief Operating Officer of Mazars Financial Services.

The majority of South Africans use pension and provident funds as their main, and often sole, form of saving for retirement. However, because they can access their money when they change jobs, they often use their funds to settle debt and buy fancy goods. But spent capital can’t be replenished. This justifies protecting their capital, says Fenwick, and while compulsory preservation won’t alleviate the problem, it will reduce it dramatically. “The problem of insufficient retirement funding will only be alleviated once 20% of monthly income per employee can be saved from start of work to retirement.”

People generally underestimate the time it takes to accumulate enough capital to retire. This applies to compulsory as well as voluntary savings. Future projections always seem far-fetched and unrealistic and investors often can’t believe the sums of money required to retire in 30 or 40 years’ time.

“By the time they realise they have a significant shortfall, it’s generally too late. Advisers have a key role to play in reinforcing this reality and explaining the crucial impact of compound interest and the eroding effect of inflation.”

Assurance companies also need to come to the party, Fenwick says. “They have to re-visit their strategies and move away from typical insurance-based investment products which are expensive, rigid, and very often inappropriate for the people they target for example selling endowment investments to low tax payers. Both assurance companies and asset managers should also review their monthly minimums, many of which start at R500. This is just too high for a large portion of the public. Perhaps a low cost passive investment style is a solution.”

Government has said that fees are undermining savings, and while Fenwick agrees that some products are plainly too expensive, he says that fees can in certain cases be justified if investments meet their objective of outperforming inflation, cash and the market over the long term. Investors who want to invest in a low-cost manner, can make use of products like index trackers, ETFs and retail bonds. “But if they want superior returns, they’ll have to invest in more costly products to compensate fund managers who exceed their benchmarks and therefore exceed average returns. However, be mindful that less than half of fund managers manage to beat the All Share Index. Fund manager selection is therefore crucial. Perhaps it must be considered that fund managers who fail to beat their benchmarks should be penalised by reducing their fees since many fund managers charge performance fees for beating their benchmark.”

Fenwick welcomes the fact that government is considering introducing tax-exempt short and medium term savings products. “Tax is another big issue affecting savings and any assistance is positive,” he says. “It will be interesting to see what the restrictions and limitations of these products will be. We expect they will be interest-based and of a simple nature with low minimum requirements. The most encouraging aspect is that they will be mostly aimed at lower income groups where underfunding for retirement is most noticeable.”