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A fresh approach

20 June 2019 Jonathan Faurie

Take all that you thought you knew about an effective retirement model…put it in a box…and pack it away. The South African financial services industry needs to be innovative when it comes to solving the retirement savings challenge within the South African context.

This has put us firmly on the road that we are on today where very few people in South Africa can retire with a peace of mind that their financial futures are secure. 

Diversity is a problem

The South African challenge is that its population is very culturally diverse. Culture influences our thinking, our spending habits as well as our saving habits/propensity towards saving. 

However, this challenge is not unique to South Africa. Singapore faced a similar problem as the country experienced a population boom and became a global destination for business. This saw the cultural demographic of the country grow very rapidly in different directions. 

According to a presentation by the Alexander Forbes Research Institute, Singapore noticed that there was an inherent problem in legacy retirement products. 

The presentation points out that during an individual’s career, their benefits are decided on by employers or boards of trustees who have little insight into that individual’s specific needs. By necessity, these decision-makers need to establish a median. 

The solution

The solution to this was to get innovative. Singapore established the Central Provident Fund that took a different view to solving the retirement equation. 

An employee contributes 20% of their salary towards the Central Provident Fund; this is matched by employers. These funds are then distributed to address different needs. 

Thirty percent of the contribution goes towards saving for housing, education, approved investments and retirement which includes a top up option for other family members. Four percent of the contribution goes towards savings for hospital costs, and 6% of the contribution goes towards saving for old age and other contingencies. 

Can this work in South Africa?

The presentation points out that the Singapore model provides an interesting starting point for this discussion within the South African context because it recognises that retirement savings may not always be the top priority for long-term savings when a country or a population within that country might have greater economic imperatives. 

The presentation adds that the Singapore model allows individuals and families to place as much attention on the journey as on the endgame of retirement income. This seems to be something that South African retirement fund members are pleading for. 

The problem with this model within the South African context is getting a culturally diverse population, facing different challenges to agree to models that would suit everybody. 

However, the presentation points out that if we could all agree that it is the spirit of what the Singapore model is trying to address that is powerful, and not get caught up on trying to emulate the details of their programme, then it is the essence of their model that we could begin to capture in South African funds. 

South African realities

The South African financial services industry understands that clients have their own realities when it comes to the retirement equation which are not always easy to solve. These realities may prove to be a significant barrier to implementing the Singapore model locally. 

However, the presentation states that the industry can engage with these realities in the

following ways:

  • The industry can challenge whether securing a 75% replacement ratio is really the most critical target when there are any number of ways that individuals can secure a stable retirement environment above and beyond that explicit income;
  • Insurers can extend an individual’s commitment to long-term savings programmes by enabling them to solve for other imperatives in addition to retirement income;
  • Provision could be made into an emergency savings vehicle that allows them to dip into reserves before being forced to cash in their funds; and
  • Focus could be concentrated on structuring solutions that allow individuals to continue contributing into an identical programme with identical benefits irrespective of who their employer is. 

Adviser engagement

Whether it is feasible or not to implement the Singapore model in its entirety – or parts thereof – remains to be seen. However, there is one factor that cannot change, financial advisers and insurers will be crucial to solving the future retirement equation, no matter what it looks like. 

The presentation points out that advisers can address the various realities that clients face by asking them some key questions. 

If an adviser asks an individual what matters to them, the likelihood is that people will struggle with the answer. In addition, what matters is likely to change for that individual quite often. That’s where having a circumscribed set of options such as the ones provided by a benefit platform can play a vital role. Advisers need to point this out. 

The value of this model will also benefit insurers. The presentation points out that circumscribed options sets up guard rails and rulesets which govern what a client can and cannot do within those parameters. 

People, for the most part, need this level of guidance, especially in a system they don’t fully understand. 

Editor's Thoughts:
People are looking for products and solutions that teach them how to get from point A to point B in their financial journeys. Are we any closer to achieving this? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

 

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