South African businesses must adopt new retirement solutions

It is of great concern that the vast majority of South Africans reaching retirement age will not be able to support themselves financially during their retirement. This places a burden on the state as well as the economy to support the growing number. As

This according to De Wet van der Spuy, Divisional Director: Product at Liberty Corporate, who says there are several issues that have contributed to this complicated scenario. “For a start, we are living longer with recent research conducted by the Department of Work and Pensions in the UK indicating that one in every three girls born in the UK today will reach their 100th birthday.”

Van der Spuy also notes that while South Africa may have a lower life expectancy, our overall health and longevity is better than any time in our history, a phenomenon that can be attributed to modern medicine and technology. “While this should be viewed as great news, it also brings with it its own set of challenges,” he says.

“For example, if one considers the average retirement age to be between 60 and 65, where we may have had to plan for another 15 years in the past, we now have to plan for 20 to 25 years ahead and this poses the possibility of having to work longer,” explains van der Spuy.

Van der Spuy says that life expectancy is not the only concern. “Looking at the broader economy, South Africans are faced with the challenge of high debt, high unemployment and a culture of poor savings.

Statistics show that there are currently around 9 million South Africans with accounts in arrears; a staggering number for a country where 13 million people are employed. As South Africans, we simply do not have enough saved to comfortably support ourselves or our economy. As a result we rely on capital from abroad to finance our economic growth leaving us vulnerable to the turmoil in global markets.”

Van der Spuy says it is therefore crucial that South Africans start to take responsibility for their own financial future. “As a vehicle to pool occupational retirement savings, an umbrella fund provides an excellent option for businesses to consider for their employees. Typically, an employer would choose to participate in an umbrella fund rather than a standalone fund as it offers a sound bundled retirement fund solution.”

According to van der Spuy, an umbrella funds solution means that an employer gets access to retirement savings and group risk benefits, while effectively outsourcing the complex administration of such an arrangement.

“This bodes well with the recent pronouncements by the National Treasury as, amongst other things, complexity and lack of transparency have been one of the key issues they have been deliberating to change.

He says an umbrella solution, as opposed to a standalone fund, adheres to retirement reform requirements and also provides simple and cost effective solutions for members.

Furthermore, van der Spuy says an umbrella fund model offers a vehicle for employees to save for retirement in a tax efficient manner, as well as the ability to pool risk.

“In addition, a business generally incurs a substantial management burden in setting up its own standalone retirement fund. An umbrella fund also takes away the management burden from the business by offering its own set of trustees, who adhere to regulatory requirements and who implement proper governance.”

From a cost point of view, he says businesses then have access to economies of scale through Umbrella Funds in terms of administration, governance and investment costs. “Also, by partnering with an established employee benefits provider, a company gains the benefit of access to expertise in benefit design, and the reassurance of expert governance,” concludes van der Spuy.