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Survey flags “hole in bucket” of wealthy retirement

14 July 2010 Alexander Forbes

A recent survey by Alexander Forbes has revealed one of the main reasons South Africans don’t have adequate retirement income – cashing in their retirement savings when they change jobs.

John Anderson, Head of National Consulting Strategy at Alexander Forbes, said that the company’s latest Member WatchTM survey covered 690 000 members in it various pension funds.

In order to assist Trustees, management committees and employers to formulate appropriate benefit strategies, Alexander Forbes continually monitors members’ positions and behaviour through its Member WatchTM surveys and analyses.

Anderson noted that on average, people change jobs seven times during their working lives.

Said Anderson: “Cashing in retirement savings when moving jobs is a hole in the bucket of people’s retirement savings. Only 5 to 10% of South Africans are expected to retire with sufficient income.

“Not preserving your retirement funds could be the difference between living in your children’s spare room in your dotage and being self sufficient. It has a devastating impact on your funds available in retirement.”

“Often people don’t realise until it’s far too late the impact of not saving.

“Even though you might have a long time to retirement, or you feel that the amount you have saved up in funds is not worth preserving, remember that the power of compound interest plays a massive role in securing a healthy retirement.”

Anderson noted that the survey look at the main factors that influence a member’s ability to achieve a “reasonable level” of income after retirement.

The concept of a reasonable level of income after retirement is generally defined in terms of a net replacement ratio (“NRR”). A NRR is simply the ratio of a member’s income after retirement to his or her pensionable income before retirement.

Based on the Alexander Forbes’ 2005 and 2008 research in South Africa, it found that the general pattern of preservation of retirement benefits when individuals leave employment remained the same.

Older members and those with higher salaries and / or benefits tended to preserve more.

“But overall the preservation rates in the country were worryingly low. Most recently between 0% and 20% across most age ranges according to our research, “Anderson added.
 (Click on image to enlarge)

 

It is expected that the low preservation will continue through 2010 given that individuals are generally still financially stretched. Also, previous experience has shown that in economic recoveries the preservation rates and propensity to save are not much higher.

“Unfortunately, it appears that when the times are good, preservation rates are low. In the bad times, preservation rates are even lower,” said Anderson.

To illustrate the impact of non-preservation on members’ retirement benefits, Alexander Forbes modelled the accumulation of a member’s retirement savings from age 25 to age 60.

Based on the assumptions used, if a member preserved his benefit each time he exited a fund, he could expect a net replacement ratio of approximately 70%. However, if he displayed the behaviour found per our 2008 survey, he could expect a substantially lower net replacement ratio.

“This could be as low as 15% of pre-retirement income which is far too little for a comfortable retirement.”
(Click on image to enlarge)

 

“The important thing to remember is that preserving retirement funds is key.

“When you move jobs, you should first look at transferring the amount to your new employer’s fund or, alternatively, a preservation fund or retirement annuity. You should also look at what your current position is and whether you are still on track for a reasonable retirement,” advised Anderson.

 

Quick Polls

QUESTION

Is relying on a primary home as a source of retirement equity still a viable strategy for South Africans?

ANSWER

Maybe, depends on location
No, too unpredictable
Not sure, 50-50
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