The journey towards retirement
How are we approaching retirement? How are we ensuring that our clients are working towards a comfortable retirement? The industry is beset with challenges and an increasing number of people simply cannot say that they are on track to achieve this objective.
We are all aware of the challenges that we face. South Africa is in the midst of a severe economic downturn with jobs and increases that outpace inflation not easy to find.
Navigating the perfect storm
All of this has effectively created a perfect storm in the market. In order to survive the perfect storm, one has to navigate through it.
If your clients belong to stand alone funds, they are taking the wheel of their navigation themselves. They are in charge of the decisions they make. If they belong to umbrella funds, they are in essence outsourcing this navigation to a board of trustees in the hope that they will make the right decisions to achieve the goal of a comfortable retirement.
Viresh Maharaj, Chief Operations Officer of Sanlam Employee Benefits, says that no one method of investing is more appropriate or inappropriate than the other as each have their merits in certain situations.
There are questions that need to be asked when your clients opt for one form of investment over another. Maharaj points out that the main reason people flock towards umbrella funds is the fact that they are cost effective (the costs of running the fund are shared across a number of members). This may be true and is an issue as the Congress of South African Trade Unions have gone on record a number of times saying that the costs of running a retirement vehicle are simply too high.
“This is where caution needs to be taken. Maharaj points out clients must not fixate on costs and see these costs as the missing piece of the retirement puzzle. There are other factors that need to be considered,” says Maharaj.
Focus on the journey
One of the most iconic athletes of our time, Carl Lewis, said that a person must focus mostly on the journey, and not the outcome/destination. While this could be dangerous when it comes to retirement, there is a lot of truth in this statement. If you focus on the destination or the outcome, you may suffer from analysis paralysis and not know the steps needed to take you there.
In a world where there is an increased focus on the consumer, perhaps it is the time to encourage trustees and fund managers to move away from talking about governance framework towards engagement regarding consumer outcomes.
In a paper titled: Age-dependent investing - Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners, authors David Blake, Douglas Wright, Yumeng Zhang make an interesting proposal.
In the paper, they said that ideally, a person should not make any retirement contributions until age 35. At age 35, they then need to cap their standard of living and any increase in salary which is above inflation needs to go towards retirement savings; all of it. They also paint different investment pictures as to when to invest in equities and when to invest into government bonds.
Willem le Roux, Head of Investment Consulting and Actuaries at Simeka Consultants and Actuaries, points out that this is risky as it does not address the appropriate risks at the appropriate time. It is virtually impossible to cap your standard of living at 35 because you would then assume that the house you are living in at that age will be the house you die in, the car you drive will be the car you own forever, and the number of kids that you have will be your complete family.
But this complicates two challenges that Sanlam picked up. One is the fact that clients are only receiving financial advice ten years before they retire, and the second is that robo-advice is becoming an issue in the industry. what does the future hold?
Editor’s Thoughts:
Winston Churchill once said that you will never reach your destination if you stop and throw a stone at every dog that barks at you. There are many messages of doom and gloom in the industry, and while one cannot take a head in the sand approach, clients must realise that the journey towards retirement is their journey, they only need to pay attention to messages that are appropriate to them. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
