Lockdown and pandemic may force a rethink of retirement funding models

09 July 2020 Gareth Stokes

The global pandemic and subsequent national lockdown have exposed fault lines in South Africa’s retirement funding industry. Some argue that pension fund regulations should be changed to allow local savers to dip into their retirement savings during times of financial hardship; but the stark reality is that few retirement fund members have enough money saved to make a meaningful difference. Viresh Maharaj, Managing Executive at Sanlam Corporate Distribution, hinted that anyone pinning their hopes on retirement savings as a financial crutch through the pandemic-induced crisis were in for a shock. His comments were made during a media presentation, held the day before the release of the 2020 Sanlam Benchmark survey.

What EB consultants think

It has been a busy week for journalists covering the employee benefits and retirement funding sectors, with the 8 July 2020 Sanlam Benchmark Symposium taking place just two days after the release of the 2019 Alexander Forbes Member Watch ™ survey. The 2020 Sanlam Benchmark polled views amongst 140 professional employee benefits consultants and 230 representatives from employers and retirement funds during the lockdown, to learn more about their experience of the pandemic and their expectations for the future. The research was supplemented by a poll of 106 consultants and focus groups of fund members and retirees conducted prior to the lockdown. 

A key trend emerging from the 2020 survey is the shift in focus from institutional retirement funding towards engaging members. “The top trends that emerged from our pre-pandemic interviews with consultants centre on adding value to members’ lives,” said Maharaj. Consultants were more concerned with member-centric trends such as technological innovation, member focus, offering integrated suites of services, and flexibility, than investment-focused topics like capital protection, indexation, and impact investing. Issues that were ‘top of mind’ among those giving advice in the competitive employee benefits landscape include the cost of benefits and services and provision of financial advice through to members. 

Getting the message through

Communication emerged as a central theme, as employee benefits consultants realised the need for clearer member communication, purposeful member engagement, and a wider consideration of the impact of their advice on members. The survey also revealed a growing focus on the use of data to impact members. “Our consulting capability has historically been aimed at the board of trustees; but the individual has now emerged as the focal point,” said Maharaj. He observed that the dramatic shift to umbrella funds over the past decade had accelerated this trend by freeing up consultants to interact with members. “More than a million members joined the big five umbrella funds over the last decade,” he said, adding that a renewed focus on advice was expected following the September 2017 default regulations. 

Rigitte van Zyl, Chief Client Officer for Sanlam Corporate, was on hand to discuss the impact of pandemic on individual retirement members through the 100-plus days of lockdown. She noted that members’ emotional and financial wellbeing had been severely impacted. A recent Statistics SA ‘lockdown’ survey indicated that around 8% of South Africans had lost their jobs; 26% had experienced a reduction in income; and 19% were unable to meet financial obligations. 

Relief from financial contagion

This fear has carried through to the retirement savings sector, with a quarter of the consultants, funds, and employers surveyed for the 2020 Sanlam Benchmark reporting an increase in member queries and complaints about fund balances. Many members also explored the possibility of accessing portions of their capital to assist in these difficult times. “Given that retirement funds are not insulated from the pandemic-linked financial contagion, we had to consider how employers might offer relief to their employees,” said Maharaj. The most popular survey response was to implement temporary suspensions of retirement fund contributions followed by suggestions of a hypothetical increases in the tax free withdrawal, from R500 000 to R1 million. 

Maharaj said the proposed solutions showed a disconnect with reality. “Around 50% of our retirement fund members have total fund values of less than R50 000”, he said. Other statistics are just as concerning: Only 60% of members had retirement fund balances exceeding six months of pensionable salary; and only one in 10 had accumulated more than R500 000. The suggestion to access retirement savings to assist with financial hardship is unworkable because South Africa’s retirement fund members have not saved enough. “The low levels of preservation have hamstrung the industry and we now see, in lockdown, that we have nothing in place to provide emergency relief,” he said. 

Nine in 10 employee benefits consultants had applied for a suspension in contributions for an average duration of between three and six months. The longer these suspensions endure, the higher the impact on accumulated savings at retirement. “Assuming these suspensions last six months we expect an impact of between 1% and 3% on final fund values,” said Van Zyl. “The elephant in the room is how long the suspension lasts and the longer term impact of lockdown on individual member’s finances”. COVID-19 looks certain to have a lasting impact on South Africa’s retirement funding methodologies and may even trigger a comprehensive review of the status quo. 

Incorrect allocation of funds

We asked Sanlam whether retirement funds were intended to provide emergency short-term financial relief. Maharaj admitted that the regulation was clear about a retirement fund’s purpose, being to facilitate decent outcomes at and during retirement; but argued that the societal changes and political pressures that we face today might force us to revisit the current framework. Step-changes happen: “We have already seen a move from defined benefit funds to defined contribution funds and witnessed standalone retirement funds making way for umbrella funds,” he concluded. “Perhaps it is time to have another conversation about the role of retirement funds and whether they are relevant to the modern day consumer”. 

Writer’s thoughts:
Recent changes to retirement regulation are aimed at protecting retirement capital and preventing members from making ill-thought early withdrawals when they change jobs. We would argue that accumulating enough capital to ensure a sustainable income through retirement is the raison d’être of the retirement fund industry; but can we really afford to ring-fence this cash for retirement when we have real ‘life and death’ money issues in the present? Should retirement fund assets be more accessible to members? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].


Added by Gareth, 29 Jul 2020
It is certainly worth considering Harley’s suggestion for a review. An interesting aspect of the comprehensive review of financial sector regulation that has taken place recently is the heavy focus on advice and advice outcomes.

Perhaps it is time to consider products and product provider outcomes too. A brutal reassessment of fees throughout the system combined with an introduction of greater regulatory flexibility would be a welcome start.
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Added by Harley, 09 Jul 2020
The SA Retirement Funding platform is archaic, punitive, inflexible, lacks transparency, costly and slanted in favor of the Insurer for platform fees & the Broker Commissions ..., a total review is required to ultimately benefit the Policyholders best interests in treating the customer fairly after all the funds belong to the Policyholders
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