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Change behaviour to solve the retirement riddle

17 August 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The best way to get to grips with South Africa’s retirement readiness is to study the results of the Sanlam Employee Benefits (SEB) 2011 Benchmark Survey. Already in its 31st year the latest survey allows the life company to take a retrospective look at v

For those active in the financial services sector it comes as no surprise that the most significant change between 1990 and today has been the shift of the risk and responsibility of retirement saving from the employer to the employee. “While we do not challenge the rationale behind the move away from the defined benefits system [to defined contributions], the research shows that members are still not accepting responsibility for their own savings – and that many members aren’t even aware that they carry this risk,” observes Dawie de Villiers, CEO of Sanlam Structured Solutions.

The savers’ Catch 22

A survey always reveals discrepancies between the reality and what respondents think they know. In 2011 the Benchmark Survey revealed that 53% of respondents believed they were “on track” for a comfortable retirement, yet a third had no idea where there retirement savings were invested – and a similar percentage didn’t know that they had a choice in how they were invested. As I ponder these statistics it occurs to me there is a certain “Catch 22” in saving for retirement.

It requires a great deal of discipline (or faith if you prefer) to believe that a 25 to 35 year process will deliver the required capital lump sum upon retirement, regardless of what the studies say. And it is particularly difficult for an individual saving towards retirement to determine whether or not they are making progress to their ultimate retirement objective. The more frequently we look at our so-called pension pot the more nervous we become. Each short-term market collapse can wipe thousand off one’s accumulated retirement savings. And a massive market hiccup like that experienced in 2008 leaves long-lasting scars. The “Catch 22” is that by taking an active interest in your retirement savings plan you are tempted to fiddle with it based on short-term fluctuations and other external market noise.

An investor who started saving for retirement in 2000, and took an active interest in his annual benefit statement, would have felt rather “green around the gills” over the period 2007 to 2011. A frightening slide presented at the Benchmark Survey presentation was the average pension fund value, which all but stagnated over that five-year period. Pegged at around R230 000 per member in 2007 the average member fund value dropped to R210 000 in 2008 and to an alarming R180 000 the year after that. And by 2011 it had recovered to only R240 000… The average member will be staring at a virtual “flat line” in terms of return over the five-year period and have to accept the invested funds failed to grow with inflation AND that the contributions over the period had been “lost” to market contagion. Given this scenario it’s no wonder savers who take an active interest in their accumulated retirement savings fret when they sit down with their financial advisers for an annual revue.

Contributions on the up, but still not enough

The Benchmark Survey reveals that gross contributions have picked up in 2011 when compared with the past few years. On average members contribute 16.3% to employee benefit funding – nicely ahead of the 15.5% five-year average. (Employers contribute 10.1% in total, versus the 6.2% chipped in by employees). However, not all of this funding is directed to retirement saving. Approximately 1.6% of gross salaries are “lost” to group life policies, 1.2% to disability cover and a further 0.9% to administration – leaving only 12.6% to savings. This amount is then further eroded by fund management and administration fees at various levels in the fund investment process. In reality, going back 10 years, the net savings rate has just clawed back to its 2002 level of around 12.4%! Between 2003 and 2010 the net savings rate has hovered between 11% and 12%!

Lessons for new fund members

Today’s retirement landscape is very different to what it was three decades ago. Back then Joe Senior saved 15% of his salary, for 40-year, earned CPI + 5% on his savings and preserved his accumulated funds in the rare event he changed jobs. He was able to retire with 75% of his pre-retirement income and lived comfortably enough through 10 to 15 years of retirement.

Joe Junior lives a much faster life. He struggles to tuck away 15% (as illustrated by the 12.6% survey average), is likely to live longer in retirement, and tends to hop from one job to the next, spending his cash lump sum each time instead of preserving it. The Benchmark Survey bears this out, with 70% of members taking the full cash value when changing jobs and only 18% preserving or reinvesting the cash. Asked to indicate what they were blowing their retirement cash on, 36% of survey respondents said they were paying down short-term debt, 29% ploughed it into their mortgage bond, 29% spent the money on home improvements, 24% on living expenses and 22% on own business.

Even the “sensible” options mentioned above can end in disaster. Too many individuals who invest retirement savings in their mortgage bonds end up drawing it out for non-essential expenditures later on – and many who invest their pension money in businesses end up going “belly up”, causing irreparable damage to their retirement plans. An amazing revelation from the latest survey is that people know they are doing the wrong thing. A whopping 85% said they understood that by NOT preserving they may not reach their retirement goals…

Part of the solution is...

The current retirement industry model – developed in a post-World War II environment when people typically stayed at the same company until retirement – simply isn’t servicing the modern day consumer. “While the industry has acknowledged repeatedly that something needs to be done, our education and communication endeavours are not having a strong enough impact – what we need now is to shift our focus from improving knowledge to changing behaviour,” says Danie van Zyl, head of Guaranteed Investments at Sanlam Structured Solutions. Savers must begin saving with the end in mind, accept guidance in their decision making, and be made to opt out of investment and preservation defaults...

Editor’s thoughts: Another Benchmark Survey – another similar result. It seems as if South Africa’s formal (employer-linked) retirement savings environment has flat-lined over the past couple of years. Do you expect to see significant changes in future employee benefit survey results without radical interventions, possibly by way of increased regulation / legislation? Please add your comment below, or send it to


Added by Ben, 17 Aug 2011
To make matters worse, Joe Senior's retirement provision was typically based on 100% of salary, whereas Joe Junior is subject to the modern trend where only about 85% of his salary counts as "fund salary". So his 12.6% saving rate is in reality even less, and even fewer people realize this!
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Added by Wicus, 17 Aug 2011
If you invest in paper assets you will never be able to retire financially free. Look at statistics - only 1% of people will be able to retire financially free. Why is that? The financial system keeps the masses poor. By keeping the masses poor and ignorant the financial institutions are the only ones making money. They make us believe that we are not capable of managing our own investments - leave it to the so called experts or gurus. But, who's interest do these experts serve? Not the investor's, but the system's. If they do not do that, they will be out of business. In order to be part of the 1% you need to first invest in yourself in order to understand how money and investments work. Then get the necessary skills and knowledge to do your own thing and generate as much money as you like. The financial institutions will not do it for you and by investing with them, you will stay poor for the rest of your life. Your future is in your own hands.
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Added by Concerned, 17 Aug 2011
Despite all this evidence, the government still aims to discourage middle to upper income earners from saving by disallowing deductions in excess of R280 000 p.a. Surely madness but part of a socialist march to make us all poorer.
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