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Solving South Africa’s retirement savings crisis

09 September 2021 Lebogang Mohlabeng, Associate Investment Consultant at RisCura

For retirement systems in many countries, the pressures from Covid-19 exacerbated those that were already present before the virus hit. One might say that the retirement savings crisis is a pandemic all on its own and South Africa has had multiple waves of it.

According to the survey results in the 10X South African Retirement Reality Report 2020, about 50% of South Africans do not have retirement plans. Of the respondents who do, 75% are uncertain about whether they will have enough to live on once they retire. Only 6% of the respondents confirmed that their retirement planning was well thought out.

To transform this status quo, we need to increase education on the importance of retirement saving and this must be done from the ground up. The work needed to be done to transform this crisis into an opportunity, is in our collective hands – those of individuals, employers, trustees, government, advisors, and broader industry professionals alike.

There are several challenges at play

The results from the 2020 Sanlam Benchmark survey showed that 61% of retirees are unable to make ends meet. In 2020, Alexander Forbes saw a 30 000-retirement fund member decline resulting from retrenchment, processing a shocking 4 000 cases per month at the height of lockdown.

A devastating financial trade-off that many South Africans face is short-term survival versus long-term preservation. Many South Africans with retirement plans are sadly failing or have failed to save sufficiently. Some may view retirement saving as a luxury item that is mostly accessible to high-income earners. This is of course mostly not true but continues to be a challenge as to how to bring all employed people into the retirement safety net. Even small contributions can add up meaningfully over time, but the awful reality is that so many cannot afford to save at all.

The financial literacy gap among income earners often leads to many employees not knowing how much to save to retire comfortably, and their contributions being too low to meet that goal. Most retirement fund members are not well informed about their funds. There is often an unnecessary complexity attached to these matters and many retirement schemes do not provide adequate information to their members and prospective members.

The conundrum continues

For numerous employees, reducing their retirement contributions is essential to surviving financially.

While the government’s efforts to feed strained income earners by allowing early retirement fund withdrawals do not go unnoticed, for this to work, preservation rules will need to tighten, such as making it compulsory for all income earners to save at least a small portion of their salaries for when they do retire. Crucially, more education is needed for members to understand the consequences of withdrawing early from their retirement funds. Here lies our long-term versus short-term conundrum and is something that requires careful management.

Cashing in retirement funds will help a lot of households meet their current survival needs, but it could be at the cost of their ability to meet future needs. Trustees must ensure that members are well-informed about their retirement funds, the different options available to them, how much they need to save to achieve specific goals, the risks involved and the consequences of the financial decisions they make today.

If there is anything positive to be gained from the effects of the pandemic, it is the increased awareness of what the future could look like if the retirement savings crisis is ignored. The financial services industry can collectively contribute to solving the retirement savings deficit. This responsibility extends to, together, transform the investment and savings industry and to help build a sustainable socio-economic environment worth saving for.

But how?

To create this transformed industry, principles of inclusion and investing with care need to be applied. Employers, through their human resource departments, need to actively encourage employees to save by having a financial literacy programme for each to enroll in and to provide alternative saving options like unit trusts, particularly in the informal sector where pension schemes are not offered to employees.

Trustees together with investment professionals should formulate solid long-term investment strategies that will not only yield good returns with ongoing reasonable fees, but will also cause no additional harm to society or the environment. To invest with care is not only about money and numbers, but also the lives and futures of all the people who are impacted by the journey of saving along the way. This is where impact investing comes in, whereby investing in a sustainable world means that the pool of wealth created continues to grow, and feeds into other areas of the nation, reshaping the reality and enriching the environment many of us wish to retire into.

Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
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