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The numbers show that the country is not yet winning the game in terms of retirement savings, says Michael Prinsloo, Managing Executive: Research & Product Development at Alexander Forbes.
“This isn’t a country where retirement is a number-one financial priority. People are largely under pressure and they need to take care of wider family groups. These are South African realities,” he adds.
Prinsloo was speaking at the launch of the 2018 Alexander Forbes Member Watch™ survey, a piece of research that focuses on the key stakeholders in the retirement journey: the members saving for retirement.
He adds that Alexander Forbes is extremely proud of the survey that was started back in 2006 when the sample size stood at 320 000 members belonging to 460 employer clients. This has grown to just over one million members belonging to 2 030 employer clients at 31 March 2018.
For the first time, the 2018 Member Watch uses data from all the South African retirement funds that Alexander Forbes administers, meaning that the survey has the biggest membership and employer groupings data sample of all the retirement fund surveys available in South Africa.
One of the findings of the Member Watch Survey is that the average projected replacement ratio stands at 40.5% (This is the ratio of the income you receive from your pension once retired, to the salary you were receiving just before retirement).
The average actual replacement ratio of those employees that retired during the last year stands at 28.8%.
“This means that for every R10 000 that an employee earned pre-retirement, their pension is R2 880 – and that is a 70% reduction in lifestyle,” says Prinsloo. “Can people handle it?” Meanwhile, retirees who achieve a replacement ratio of 80% or higher stands at 5.17%. The industry norm in South Africa is to target a replacement ratio of 75% or more.
Prinsloo points out that low preservation rates are one of the biggest reasons for replacement ratios being lower than the target. Policymakers are attempting to solve the problem by regulating the use of a default preservation strategy when a member leaves their employer and doesn’t make a payment election, he adds. Several funds already allow members this option, but the law requiring this approach officially comes into effect on 1 March 2019.
One of the most common reasons given by members for not preserving their benefits is that their fund credit is too low to warrant the trouble and expense of a preservation fund, he notes. “A total of 61% of those who chose not to preserve any of their benefits had a benefit of between R0 and R25 000 and the other 37% of non-preserving members had already accumulated a significant benefit but chose not to preserve.” He warns that individuals should be made aware of the longer-term impact of not preserving even relatively modest amounts at younger ages because of the power of compounding.
Prinsloo notes that according to the latest Member Watch Survey, the number of members preserving has decreased from 11.5% in 2012 to 8.7% in 2018 – although preservation has improved by 4% per annum over the last three years.
The public services sector had the highest preservation rate in 2018 with 33% of members preserving. The retail, wholesale and hospitality sector had the lowest preservation rate with only 5.94% of members preserving.
The energy sector had the highest proportion of fund members who had access to financial advice.
Predictive analytics tools used on the Member Watch data have identified five key factors that affect the level of preservation. These factors are:
- Size of the fund credit: The higher the fund credit at exit, the higher the probability of the member preserving their retirement savings. This affects the amount of tax that will be paid, which acts as a disincentive for members to take their benefit in cash. Fund credit size is also correlated to the length of pensionable service and salary. Other factors include the monthly pension that members can buy with the retirement lump sum. If members feel that the monthly pension they can buy at retirement is too low, they are more likely not to preserve.
- Industry sector: Some industries have a higher average preservation rate than other sectors. Industries with high turnover rate and very high resignations tend to have very low preservation rates. The level of financial literacy within the industry is also a factor. For example, in the retail sector where people change jobs more frequently and there are more contract workers, the members are more likely to take their benefit in cash.
- Exit type: The exit type also has an impact of the likelihood of preservation. The data shows that the highest rates of non-preservation are on resignation and early retirement. The reason for the exit is also often correlated with the member’s financial situation. Members without emergency savings or who are highly indebted are more likely to take their retirement savings in cash.
- Access to financial advice: Access to financial advice has a significant impact on the level of preservation. Members who have access to financial advice have higher preservation rates.
- Whether the fund offers a preservation solution: The analysis shows that when members can preserve in a fund-supported preservation solution that is easy to access and institutionally priced, the preservation rate is higher.
The Member Watch Survey also shows that fewer members are making investment choices, rather relying on employers and trustee-provided choices.
“This highlights the importance of default investment portfolios and we have also seen the importance of fund-supported solutions, such as annuity strategies, to help employees navigate to retirement security. There is an opportunity for companies to help their employees along their full financial journey,” Prinsloo says.
Increasing normal retirement ages can also be seen in the findings. “A few years ago, the most common retirement age set by employers was 60 years, but that has now increased to 65,” he adds. “Increasing one’s normal retirement age by two years can add 8% – 15% extra income at retirement, so retiring at 65 rather than 55 can almost double a replacement ratio due to the compounding effect.”
Article written by: Michael Prinsloo (Managing Executive: Research & Product Development, Alexander Forbes)