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Category Retirement
SUB CATEGORIES General |  Savings & Investments |  Annuties | 

Tips for managing a retirement fund to achieve its objectives

27 May 2019 Vickie Lange, Head of Institutional Best Practice, Alexander Forbes

More than half of members retired with less than 20% of their final salary in 2018 according to the Alexander Forbes Member Watch. This highlights that members of retirement funds need help to retire better.

Vickie Lange, head of institutional best practice at Alexander Forbes, offers trustees and management committees the following guidance:

1. Analyse costs and benefits
View costs in the context of the value being added. It’s important to look at the costs, charges and premiums holistically. A retirement fund aims to achieve a 60%–75% replacement ratio as an appropriate income level to maintain members’ standard of living in retirement. Understand the impact of these various costs and charges on the fund’s objective, as some have a bigger impact than others.

2. Help members make informed decisions
Assist members to make informed decisions that will improve their retirement outcomes and give them an appropriate level of income in retirement:
• Communicate effectively.
• Give members access to:
o retirement benefit counselling
o appropriate financial advice to make personal financial decisions

3. Encourage members to contribute more
Offer flexible contribution rates and assist members to make informed decisions. The tax-deductible contribution rate is 27.5% of taxable income or total remuneration, whichever is higher, up to R350 000 a year. Members need to contribute 17% towards retirement savings (after fund expenses and fees) over 40 years to reach a 75% replacement ratio.

Remind members that based on their personal circumstances they may need less or more than a 75% replacement ratio to maintain their standard living in retirement. The Alexander Forbes Member Watch analysis of more than a million members shows that the average contribution towards retirement savings is only 12.17%, which is insufficient in achieving a 75% replacement ratio.

4. Don’t cash retirement savings in when changing jobs
Low preservation rates are one of the biggest reasons for replacement ratios being lower than the target. Policymakers are trying to solve the problem of low preservation rates by requiring a default preservation strategy that will automatically allow retirement savings to be made paid up in the fund when a member leaves their employer and doesn’t make a payment election.

According to the Alexander Forbes Member Watch, preservation rates for 2018 were only 8.7%. Lange explains that one of the most common reasons given by younger members for not preserving their benefits is that their fund credit is too low to warrant the trouble and expense of a preservation fund. Make individuals aware of the longer-term impact of not preserving even relatively modest amounts at younger ages because of the power of compounding.

Preservation rates increase with age. Members probably become aware of the importance of preservation as they approach retirement.

5. Build up emergency savings
A lack of emergency savings prevents members from preserving their retirement savings or increasing their contributions. Lange stresses the importance of encouraging members to have emergency savings in the event of a financial shock.

6. Delay retirement
Assess whether members are willing and able to work into their seventies. Ability depends on:
• their level of health
• job opportunities for their skill set – they may need to be reskilled

Even if senior members are willing and intend to work longer, poor employment opportunities generally in South Africa might mean that they may have to prepare themselves to retire at the company’s stated retirement age. This is especially a concern during a downturn or recession, as the economic environment isn’t conducive to finding job opportunities.

Lange says, “Trustees who embed good governance in the managing of the fund, and who stay true to the fund’s stated objectives, can add a lot of value to their members. Adding this value does come at a cost, but the cost is then worth it.”

Trustees generally need to appoint fund consultants, actuaries, asset managers and even financial advisers to assist them in:
• managing the fund
• giving members the best possible chance of maintaining their standard of living in retirement

The Alexander Forbes Member Watch analysis can be a useful tool to trustees. Together with using fund-specific data, trustees can:
• structure appropriate objectives using suitable benefit designs
• monitor the outcomes
• make changes to improve the outcomes experienced by members

“Although it’s the trustees and management committee’s responsibility to put mechanisms in place to assist members, it’s just as important for members to participate in these issues and take responsibility for their own financial well-being,” concludes Lange.

Quick Polls

QUESTION

What more can financial planners do to make retirement for clients a reality?

ANSWER

The value of the service or product a client receives will determine if they ultimately will achieve their goals or not
Most South Africans are simply not contributing enough towards their retirement savings
Ensure that investments are well diversified to achieve long-term goals to soften the blow of short-term fluctuations
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