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South African savers seem resistant to change

29 June 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The more things change, the more they stay the same! Most of you will have heard this phrase at one time or another. I’m not 100% sure who coined the expression, though a basic Internet search suggests it stems from a French-language proverb which translates loosely as “nothing changes too much.” The phrase was top of mind as I sat through a media presentation on the findings of the Old Mutual Retirement Monitor 2011. It feels as if our attitude to saving for retirement resists every industry attempt at reform!

The objective of the Old Mutual Retirement Monitor is to understand the attitudes and perceptions of ordinary South Africans, whether retirement fund members or not, on all issues relating to retirement. To this end the group commissioned a third party to conduct 1,005 face-to-face interviews of full-time metropolitan dwellers between the ages of 18 and 64. The sample was chosen to reflect the country’s demographics, with approximately half of respondents members of retirement funds and half not. “South Africans understand the role education plays in breaking the cycle of poverty but haven’t yet cottoned on to the importance of savings in achieving this goal,” said Bongani Madikiza, Managing Director of Old Mutual Corporate, introducing the findings.

The benefits of belonging

Madikiza observed that many South Africans had to defer long-term retirement savings due to financial hardship. And the survey found that many respondents viewed saving for their children’s education as a priority. The pressure on middle-aged people (35-49 years) to focus on saving for their children’s education means that their retirement preparation is likely to fall short! “The possibility exists that some respondents regard their children as a form of substitute retirement policy. However, irrespective of respondents’ views on the role of their children in their retirement, it remains very concerning that only 54% of respondents who are currently 10 years or less away from retirement are actually saving for that retirement,” he said.

The survey found that retirement fund members were better informed and more empowered than their non-member peers when it came to saving for retirement. This development can probably be attributed to the member education offered by various employer-sponsored funds. It emerged that members held significantly broader baskets of savings and investment policies, for example. Of the survey respondents who were members of employer-sponsored pension or provident funds (51%) an impressive 30% had additional non-employer retirement annuities.

In stark contrast the 49% of respondents who were not members of retirement funds had made little progress along their respective savings paths. Of the non-members, 16% worked for employers who offered retirement funds and chose not to sign on, while 58% indicated they would definitely participate if such an option were offered. Only 17% of this group ‘owned’ retirement annuities.

Making adequate provision for retirement

Fund members were, not surprisingly, more satisfied than non-members with the state of their retirement provisioning – on a scale of one (hopelessly dissatisfied) to 10 (extremely satisfied) non-members registered 4.9 versus 6.6 for fund members. The survey determined that members were less fearful and more likely to look forward to their retirement, more confident in formal retirement products, marginally better planners and more likely to feel financially empowered.

Questions around retirement age revealed a sensible mix of optimism and realism. Most respondents desired to retire between the ages of 50 and 65 years, though they realised they were more likely to be able to afford to retire in the 60 to 65 year age group (45%) or later (23%). They say nothing is certain but death and taxes… But uncertainty creeps in when we try to answer when (for death) and how much (for taxes). Old Mutual’s survey showed up a frightening disconnect between how long respondents expect to live post-retirement and how long they are likely to live. A massive 43% of respondents felt they would live for no more than 10-years in retirement. But statistics suggest the average retiree lives 14.2 years, the period your retirement provisioning needs to cover.

Sources of retirement funding...

It was also interesting to compare expectations on sources of retirement funding. The bulk of fund members (64%) said they would rely on payments from their pension or provident fund. But the bulk of non-members (32%) believed they could rely on cash savings to get by. 21% of non-members and 2% of members believed the state would meet their retirement funding needs. This reliance on the state is of particular concern due to the means testing currently applied. Only a fraction of survey respondents would quality for the State Old Age Pension given their current mix of earnings / savings.

Editor’s thoughts: Old Mutual says their Retirement Monitor 2011 survey closely mirrors results from 2010. The conclusion we draw is that South African savers haven’t wised up over the past 12 months... Do you think we can improve the retirement savings outlook without compelling the employed to save? Please add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Ben Holtzhausen, 01 Jul 2011
I think it was Langenhoven that said: "If you pick the blossoms in the spring of your youth, you will have no fruit in the winter of your old age" In 20 years time a lot of old people are going to suffer without the bare necessities of life, because of watching the 2011 rugby world cup on 3D HD TV. No matter how hard you drive the inflation argument. Not saving, means stealing from yourself more than any thief can. To steal money from yourself, is even worse than stock piling money under your mattress. The discipline to save, is THE MOST IMPORTANT ingredient to accumulate sufficient retirement capital. It is savings that make the difference between a high earner who cannot afford to retire and a low to average earner who can. Yes, insufficient returns and high administration costs has a negative effect on capital growth and surely these are issues that should be addressed continuously. But there are lots more reports of good long term returns than the few bad experiences like the one of Domstut. We have found more often than not, that the comparing calculations are totally skewed and based on data that was selectively applied. The tax advantages are mostly ignored or unjustly deemed as being cancelled out by the taxation of the monthly pension. The advantage of saving with pre-taxed money, can enhance the capital accumulation rate by more than 10% per annum. One needs quite a nifty asset manager to beat that. Some smoothed bonus portfolios do so badly they should have their license withdrawn, yet there other smoothed bonus portfolios that have a proven track record of out-performing several high risk funds South Africa's legal system has basically done everything it can, to protect the consumer against bad financial advice and -products. Has anyone thought of the cost effects of FAIS, that will eventually be paid by the consumer? Legislation that protect consumers against their own stupidity is clearly long overdue. I believe SA need the following forms of legislation: Compulsory retirement saving for everyone earning a wage. Compulsory preservation of retirement capital on resignation. Minimum retirement age should be increased from 55 to 60 Phasing out of provident funds Equal admin expenses and broker commission cap on all forms of retirement savings E.G. 2.5% of contribution, as and when. NO upfront commutations. NO front-end loadings, penalties or rear-end vacuum cleaners. Such a model is feasible. We've been practicing it for 10 years. Improve tax advantages of retirement savings, since it is ultimately the taxpayer who picks up the bill for those that did not save for their retirement. The retirement funding industry has a huge amount of under-utilized expertise, systems and administration skills. We need much higher volumes to reach the critical masses, which will utilize the industry to its full potential and ultimately lead to substantial reduction in expense ratios as well as improved returns. To answer your question: NO, NO, NO, We have no chance to improve the retirement savings outlook, without compelling the employed to save. It is a NO BRAINER
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Added by Domstut, 29 Jun 2011
Hi With my wife having yesterday received her annual pension fund statement from a large insurer, your article seemed far to appropriate for me not to make a comment. The issue, as with everything, is value for money. The actual total value of the contributions (to a very conservative smooth bonus fund) exceeded the total value of the fund after the period by 10 %. The main reason for this was the high cost levied (approx 12%) vs the small investment return (approximately 2%). Simply put, by using a pension fund vehicle to save, she lost money. While a financially more sophisticated investor could be convinced that various economic and financial factors need to be taken into account, etc, etc., the basic result is that money was lost by contributing to the fund. Therefore, no average investor in their right mind would save through this pension fund vehicle. In fact, the more and longer you contribute to this savings vehicle, the more money you will lose.. It could be more dangerous to hide your monthly contributions under your mattress (somebody could steal it,) but at least nobody will be charging you to keep it, and lose some of it - so what ever you put there, would still be there after 12 months. If you then consider the impact of inflation on your saving at approximately 7% and the loss in real value each year of the purchasing power of your money, it would make much more sense to purchase that big screen TV now! Not only are you ensuring that you purchase it before it becomes 7% more expensive next year, but you get to enjoy the benefits now. And of course, you don't lose any money... You also have the added advantage that your husband can watch the Rugby World Cup in HD which means that your domestic life is a whole lot more pleasant for those 6 weeks. When the players in the pension fund industry finally stops comparing figures with each other and offering excuses for high costs (it's that greedy intermediary again), poor performance or postioning performance as the ability of a fund manager to reach or exceed a poor benchmark, they may realise that they compete at customer level with other value offerings. In my case, I hope that my wife goes for that big screen HD TV and stops giving money to somebody who continually loses some of it. But then again, what do I know? I'm just a dumb ex-front row forward. Domstut
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