Challenges approaching from every side
What are South Africa’s major problems when it comes to retirement? If we focus purely on the institutional side of the retirement journey, taking out human elements such as lack of preservation or insufficient contribution rates, a strong case can be made for the argument that there as many institutional challenges as there are human element challenges.
No safe harbour
The above conundrum is a challenge that faces all retirement savings vehicles. This point was proven at the recently held South African Independent Financial Advisers Association (SAIFAA) where the spotlight was cast on living annuities and the benefits that they can offer to the industry.
But even these benefits are not without their challenges. Marc Thomas, Manager: Client Outcomes and Product Research at Bridge Fund Managers pointed out that the Investment Linked Life Annuity (ILLA) business is growing significantly, yet National Treasury expects 67% of all ILLAs to experience a 30% reduction in real income over the coming years.
“This is mainly being driven by the fact that the returns generated at the beginning of the ILLA product life (typically a five year horizon) is undermining the longevity of returns because compound interest has a lower initial portion to work its magic with,” said Thomas.
The cycle of chaos
There are ways around this. Thomas pointed out that one of the key questions that advisers and product providers can ask is: how do I construct a plan that will provide my client with enough income to support their lifestyle for 25 to 30 years without running out of funds?
Seems a simple enough question to ask... or is it? Thomas pointed out that this question needs to be followed by a further one: how do I decide what income increase or decrease to give my client on the anniversary of their IILA?
It seems as if product providers and advisers are dealing with two absolutes that do not have clear answers. They need to establish how long a client will live for and the economic market (risks) that the client’s savings will have to negate until the money is needed.
Two components can solve this, clients will need to rethink their retirement age and work until 70 or even 75 if they are able to, and they will need to manage their expectations when it comes to lifestyle choices as they approach retirement.
But even if we look at the last component suggested above, how much management can take place before we can put clients at risk? Clients cannot have drawdown rates of 4% in retirement to sustain their lifestyle; a realistic figure is that it needs to track inflation as close as possible. So this will be 6% if the worst case scenario is taken into account.
The mattress effect
This brings about another concern that clients are having with the industry. If all the messages are pointing to the fact that I will never save enough for retirement, even with my best efforts, why should I trust a retirement vehicle at all?
While the majority of clients do see the value of retirement savings vehicles, there is a growing choir of voices with the above concerns. David Gluckman, Head of Special Products at Sanlam Employee Benefits, pointed out that at the moment, the way that product providers advertise the retirement industry does not match the expectations that clients experience in retirement. We see pictures of retirees enjoying their retirement, we do not see pictures of the struggles that they go through to manage their cash flows.
“This is something that Treasury has realised. In an industry paper they pointed out that when clients cash in their retirement savings (leave their product providers after fund maturity), they are exposed to poor financial advice, poor decisions, and high costs. It is up to the financial services industry to protect the interests and investments of clients during fund accumulation and when they draw the funds out,” said Gluckman.
The old argument
The arguments presented above are valid. And Treasury does have a point when it says that product providers, who have the advantage of significant scale to fall back on, have a responsibility to protect a client’s investment as much as possible.
The key word above is “as much as possible”. You can preserve a client’s money to the best of their ability during the accumulation stage, but you cannot force them to preserve in a way that will guarantee funds that will last a lifetime. This has to come from the choices they make, and this needs financial education from the foundation phase (primary school level) until they retire and even after that.
Can we reasonably expect the financial services industry to shoulder this burden alone?
Editor’s Thoughts:
Challenges are approaching us from all sides. But there is a positive light at the end of this tunnel. If we all work together, Treasury, product providers, advisers and clients, we will come up with a solution to this problem. Can we solve the retirement problem? Yes we can. Will it be easy? Nothing of value is ever achieved without hard work. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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