Retirement Planning under Pressure as Recession wipes out Five years of Household Wealth

The Momentum/UNISA Household Wealth Index Q4 2012 Collaboration presents Household Wealth Data

Although the results of the Momentum/UNISA Household Wealth Index revealed a second consecutive (quarterly) strong increase in the value of nominal wealth during the fourth quarter of 2012, the data also shows that households are worse off due to relatively recent recessionary factors.

Analysis has shown that the recession of 2008/2009 reduced the real value of household wealth significantly and the knock-on effects of this are due to be keenly felt. Expressed in years, the recession wiped out five years of household wealth. This will have consequences for the retirement age of individuals and the contributions they are making towards their retirement funds. To realise pre-recession expectations, individuals are going to have to save and invest more and work longer.

Commenting on the long-term outtake of the data, Prof Bernadene de Clercq, head of the Personal Finance Research Unit at UNISA’s Bureau of Market Research said, “Despite nominal increases in net wealth, real household wealth per household is not at all sufficient for purposes of independent retirement or maintaining current living standards. Too many households – especially those who are in a position to accumulate assets thanks to strong increases in their real disposable income over the past decade – apportion insufficient shares of their income towards asset accumulating investments as they rather purchase consumption goods.”

Regarding Q4 2012 – according to the Index, nominal household wealth increased at a seasonally adjusted and annualised rate of 28.8% in Q4 2012 following an increase of 16% in Q3 2012 (quarter on quarter seasonally adjusted percentage change expressed at an annual rate – QoQSAA). These increases contributed to the value of nominal household wealth surpassing the R6 trillion level for the first time.

The main driving force behind the increase in nominal household wealth was a strong increase in the value of South African household assets. Valued at current prices (nominal terms), the Momentum/UNISA South African household asset index increased by 28% (QoQSAA) during Q4 2012, while the Momentum/UNISA liabilities index increased by 25%. Momentum/UNISA estimated the nominal value of South African household assets at R7.8 trillion at the end of 2012, while liabilities approximated R1.5 trillion.

However, when expressed in real terms (2005 prices), the picture changes somewhat. Analysis shows real household wealth increased by 14.2% in Q4 2012 (QoQSAA) to R4.1 trillion. This was mainly as a result of real household assets increasing by 13.6% in Q4 2012, outpacing the real increase of 10.9% in household liabilities (both increases in QoQSAA terms).

The main source of the increase in the value of South African household assets was the strong performance of financial assets, which constituted 72% of the value of total nominal assets by the end of 2012. The value of financial assets was driven by the performance of share prices and equity holdings. On an annualised basis, the Johannesburg Securities Exchange (JSE) All Share Index increased by 45.2% during Q4 2012 (quarterly increase annualised).

Commenting on the value of the data, Danie van den Bergh, Head of Brand at Momentum reiterated the objective of the collaboration with UNISA, “This sampling of data helps to gauge progress and a trajectory over time and, more importantly, to put into place the awareness and action needed to improve the Financial Wealth and Financial Wellness of every individual, family and business in South Africa. To be announced soon, Momentum is investing in the tools and solutions to empower and educate consumers to this end”.

The changing composition of assets and liabilities showed interesting trends.

Changing composition of South African household assets:

Assets: In 1975 non-financial assets comprised 53.8% of household assets, consisting of residential assets (28.4%) and non-residential assets (25.4%). Financial assets (46.2%) comprised of cash (16.4%), investments in retirement funds and long-term insurers (13.4%) and other financial assets (e.g. direct investments in the stock and bond exchanges) (also 16.4%). However, by 2012, financial assets comprised 71.9% of total assets. The share of investments in retirement funds and long-term insurers almost tripled to 38.4% and that of other financial assets to 24.5%, while cash holdings declined to 9%. The share of residential assets declined to 23.4% and that of other non-financial assets to 4.7%.

Changing composition of South African household liabilities:

In 1975 mortgages comprised 62.5% of total liabilities. Although this percentage declined substantially to just more than 40% in 1984, it gradually increased to 62.3% in 2009. However, an increase in other debt such as unsecured debt contributed to the share of mortgages declining again to 54% in 2012.

Despite analysis of the data showing that the estimated real wealth per household was lower in 2012 compared to 1975 (the first year for which household wealth data was produced), the good news is that a turning point seems to have been reached in 1994 as real net wealth per household on average increased by 1.75% per annum for the period up to 2012.

Nevertheless, there is still considerable concern about the health of South African households’ real wealth, as the majority of households seem not to have sufficient assets to retire financially independent.

Prof De Clercq concludes, “The decrease in the real net wealth per household over the period 1975 – 2012 is a real cause for concern and policy makers, the private sector, trade unions and households themselves should all take responsibility in ensuring a larger emphasis on household asset accumulation. Currently, most of the authorities’ policy focus is on income improvements whereas there is a clear and urgent need for household balance sheet improvements. Hopefully the data can contribute towards making the household balance sheet part of the policy debate, as well as being a catalyst for mindful change.”