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The clear divide is all but gone

08 April 2019 Myra Knoesen

At the moment a grim picture of retirement saving is painted in the South African landscape. Many South Africans either do not have the funds to contribute to savings after their monthly budgets have been exhausted, or they feel that saving for retirement is just not that important.

At the same time, key trends are shaping the retirement funds space and FAnews spoke to a few industry experts on their views of the trends, what the retirement sector could possibly look like in 2030 and beyond.

Generational shifts

“Retirement used to be something baby boomers looked forward to, but these days the clear divide between working and not working is all but gone. People are extracting more from life on the journey and so the destination is no longer the ultimate prize,” said Paul Nixon, Head of Wealth Management Solutions at Momentum.

“The traditional baby boomer and gen Xer paradigm of investing in bricks and mortar which demonstrated a sense of accomplishment, owning a car and paying attention to retirement savings relatively late in life is changing. The median age to start saving for retirement has decreased markedly from 35 (boomers) to 22 (Millennials). Millennials are far more involved and display more ownership in their financial futures and they are willing to get their hands “dirty” a lot sooner to benefit from compound interest. The rise of the “gig economy” is testament to this. Millennials are comfortable with technology and need a way to save small amounts (micro investing), they care about socially responsible investing and will trust social media (friends) far more than any advertisement asking them to save,” said Nixon.

Areas of interest

“Advances in technology can significantly improve service delivery, reduce costs, and improve the product – all of which present benefits to customers. Technology impacts the landscape, and the way financial services generally, and retirement savings specifically, are delivered. As a provider, technology creates incredible opportunity,” says Walter van der Merwe, Chief Executive Officer of FedGroup Life.

“The day will come when all transactions happen over blockchain. When this happens, the entire transactional and support systems will change significantly, and this will be of benefit to all of us,” continued van der Merwe.

“I believe every individual will have full access and full control over their retirement savings. For example, there will be an app on their personal devices that breaks down investment instruments, interest, compound interest – every aspect of savings, in a way that is clear and concise. Investors will gain a deep understanding and education on how the industry, and their personal investments, work. With the right algorithms in place, members will be protected. Careful calculations will stop members from taking unnecessary risks, but what they will provide is ultimate personal responsibility, which is empowering, and it removes dependency from the state,” said van der Merwe.

“Umbrella Fund solutions are also a major trend in the retirement fund space due to the cross subsidisation of costs. The efficiency of the solution means cost savings can be passed on to members. As a best value proposition, umbrella funds are seeing increasing interest as a group benefits option,” he continued.

“Education is another area where providers are having to make an effort. Many people don’t understand what goes into the final number, or what the implication of those assumptions might be,” concluded van der Merwe.

Key legislative changes

“Rather than resting on your laurels and waiting for legislated reform to force change, now is the time to start planning for a future that could look very different,” emphasises Saleem Sonday, Head of Group Savings and Investments at Allan Gray.

“Three key legislative changes are: Default investment portfolios; in-fund preservation and default annuitisation. How will this impact your advisory business and what can you do about it?” asks Sonday.

If we look at the asset management industry since 2000, life company asset managers have consistently been losing market share to independent asset managers, both in the retail and institutional space. Their piece of the pie has shrunk from 80% in 2000 down to 37% in 2015. We think this has been off the back of a few specific trends. Many clients leave their pension funds when they resign or retire and take their investments to independent managers. In the retail space there has been a move away from endowment and old generation products as savings vehicles, to unit trusts, and a preference for independent managers who are more transparent and offer investment choice. Investment managers have generally outperformed insurers in terms of investment returns,” he says.

“The reality is that the bulk of the assets sit in the ‘decumulation’ phase. Wealth accumulation is a slow process and most independent advisers simply cannot afford to spend time on small value clients during this phase, and it is difficult to scale your offering focusing exclusively on this group. The majority of advisers seem to prefer those clients who are nearing or at retirement, or those that are thinking about preserving when they change jobs and have already gathered assets,” continues Sonday.

“With the regulations allowing in-fund preservation and annuitisation, a large percentage of potential clients might be lost – so it makes sense to look more broadly for diversification opportunities. While corporate retirement schemes have traditionally been the territory of occupational pension funds and asset consultants, advising on umbrella funds opens up doors for independent financial advisers looking to build long term client relationships,” concluded Sonday.

Editor’s Thoughts:
As van der Merwe pointed out, these trends impact the landscape, and the way financial services generally, and retirement savings specifically, are delivered. Only time will tell what these trends could mean for the industry. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.

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Added by Derek Smorenburg, 08 Apr 2019
The SAIFAA 'In & Out-of-Fund' Default Options May 2019 Workshops in CT/JHB/KZN will unpack some of the choices that needs to be considered by all IFAs plus Default Options Strategies!
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