Government’s attempt in the recent budget speech to encourage South Africans to save more is welcomed. The annual investment limit in Tax Free Savings Accounts was increased from R33 000 to R36 000. However, this move is unlikely to spark any real change in South Africans’ savings behaviour.
We are clearly not a nation of savers at this point. According to Tradingeconomics.com/Statistics South Africa, after a record low of -2.5 percent of GDP in 2013, the household saving rate has remained in largely negative territory, ending the third quarter of 2019 at -0.10 percent.* It’s not surprising that the South African Savings Institute has labelled South Africa a nation of dis-savers**.
The latest GDP figures released earlier this week show a decrease of 1.4% in the fourth quarter of 2019. This means the country has entered a technical recession. The current negative growth environment is likely to dampen savings prospects even further.
However, Nashalin Portrag, Head of Momentum FundsAtWork, believes progressive retirement funds can play a key role in stimulating savings.
While there was some much-welcomed real personal tax relief in the recent budget, burning questions remain. Firstly, where do cash-strapped, indebted South Africans find money to save? And secondly, how to change behaviour so that when money is available, it is channelled to savings rather than spending?
There is also another dynamic at play. According to Portrag, the younger generations of Millennials and Generation Z are not fans of delayed gratification and do not embrace saving, particularly for retirement. While their rising longevity prospects mean retirement provision should be a priority, their natural inclination is for more immediate value, in the here and now.
Momentum research shows that Millennials, more than other generations, have seen a steady increase in debt over the last 4 years. So, although Millennials have seen their incomes increase, this has translated into growing debt rather than savings.
Portrag believes it is time for employers to think differently about the retirement funds they make available to their employees. “In addition to the retirement and insurance benefits that are core to any employee’s long-term financial wellbeing, employers should partner with a progressive retirement fund that gives members access to value-added benefits that generate cost savings, which free up money to fuel additional saving,” says Portrag. He offers some practical examples of how this can work.
By virtue of their fund membership, members should have access to engagement and rewards programmes that facilitate cost savings opportunities which, if used, help employees to reduce day-to-day expenses.
Furthermore, employees with group insurance benefits should receive financial returns linked to their health status and level of physical activity. They should be able to channel these savings towards retirement savings or regular monthly spend such as healthcare co-payments or general goods and services.
Portrag says, “For most members, retirement funds are the vehicle they pay a percentage of their salary to every month. But in this situation, members are actually receiving a monthly payment from their retirement fund.
Such a benefit should appeal particularly to Millennials and Generation Z who prioritise holistic health and wellness, and could help change the savings behaviour of these younger generations. By encouraging healthy lifestyles, this benefit also fuels employee productivity and reduces healthcare costs.”
Another value-added benefit employers should give their employees access to via their retirement fund is quality online study resources for their school-going children. If employees had to pay for such a benefit out of their own pocket, it would cost them around R2 000 each year. Employees juggling work-life balance pressures will not only value the cost saving of such a benefit, but it will also free up the time they would have spent on assisting their children with school work.
“These are just a few examples of how making value-added benefits available to retirement fund members can help them to reduce costs and, in doing so, frees up money for savings. However, these cost savings do not necessarily translate into short or long-term savings,” says Portrag.
“Our research shows that the average employee has a basic level of financial literacy. This makes them financially vulnerable and fuels poor financial decisions, like prioritising spending above saving.
This is why it’s incredibly important for employers and retirement funds to offer counselling and education which boosts financial literacy levels, empowers employees to make smarter financial choices and nurtures a culture of saving rather than spending.”
Empowered employees who truly grasp the power of compound interest and understand the value of tax efficient vehicles like retirement funds or Tax Free Savings Accounts are more likely to prioritise saving over spending. Retirement funds should also actively encourage their members to optimise tax advantages by making it easy for them to increase their retirement contributions.
Minister Mboweni referenced the Springboks and Miss Universe in his Budget speech, pointing out that “winning takes patience, prudence and perseverance.” While retirement fund members should aspire towards these traits, they will also need active encouragement, engagement and education from their retirement fund and employer, if they are to transform from spenders into savers.
*https://tradingeconomics.com/south-africa/personal-savings
*https://www.iol.co.za/personal-finance/sasi-challenges-south-africans-to-reinvent-how-we-save-28320779
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