Innovative solutions to address realities facing pensioners in retirement

By Janice Roberts

Three piggy banks with retirement savings message

The global economy continues to experience a lot of volatility, with previously bullish markets such as China slowing down on their growth.

South Africa is not safeguarded from the global slowdown, itself facing various challenges ranging from a depreciating currency, regulatory impacts and increased global competition coupled with retirees who need to manage their savings but who are now squeezed financially. “Navigating these structural challenges will take innovative solutions.” says Head of Product Development at Discovery Invest, Craig Sher.

Poor culture of savings

Complicating the situation is the fact that, generally, South Africans have a poor culture of savings. For example, only 6% of working South Africans are prepared for retirement. The situation is more challenging when you factor in the fact that people are now living longer in retirement due to improvements in medicines and related health developments which lead to longevity. This means that they would need more money for a prolonged retirement period.

The impact of longevity

The notion of increased life expectancy is supported by studies, revealing that there are more retirees living longer than they had anticipated in retirement. Statistics show that there is a 47% to 55% increase in retirement duration. The impact of longevity therefore poses a systemic and fundamental challenge to financial institutions and public benefits. “The knock-on effects on long term savings are extensive, as people live longer and consume more healthcare, they outlive their retirement savings,” says Sher. “This in turn has a powerfully negative effect on individuals, families, their communities and even ultimately on governments and the world.”

This is especially the case as the number of people living beyond the age of 100 has been doubling worldwide each decade, with figures expected to reach 2.2 million by 2050. For South Africa, this trend would add over 10 million pensioners to the country, placing a burden on resources if the savings culture is not radically changed. New and innovative methods of managing savings after retirement are needed to address these structural challenges.

Shared value investment model

Traditional drawdown linked annuity products are at their core just pot of money, where it is up to the individual to manage the amount of their withdrawals on an annual basis. Left to their own competence or lack there of, individuals may fail to manage their money to ensure it lasts, in which case they may outlive their savings.

Discovery Invest’s approach to linked annuities is distinctly different in the industry as it is based on shared value – the concept that by aligning company performance and success with the addressing of social needs; clients, companies and society benefit together. This manifests in Discovery Invest’s Linked Retirement Income Plan.

From an investment provider’s point of view, the company earns fees on the assets that are held within the linked annuity. The longer the assets stay with the company, the larger the fees revenue is and therefore the larger the profitability. As longevity increases, the assets will also be maintained with the company for longer, as opposed to being paid out on death.

“The premise is that if individuals do what is best for themselves, for example, become healthier and maintain responsible drawdown levels, Discovery will, in turn, generate more revenue,” explains Sher. This surplus is then used to help these same clients by giving them the higher income levels that they need to sustain their longer expected lifetimes. It’s a virtuous cycle.”

To this end, the Discovery linked annuity automatically contains a powerful benefit at no additional cost called the Retirement Income Investment Integrator. It rewards clients for maintaining responsible drawdown levels and being healthy by boosting their income levels by up to 50%.

With the pressure on the industry demanding that investment providers focus their thinking not only on dealing with the challenges that directly emerge, there is also a pressing need to innovate to make significant step changes to the investment industry and clients. “Innovation will be central for solving structural challenges going forward,” says Sher. “For Discovery Invest, we have seen that the power of innovation has the ability to create a step change for the industry and hence we are already focused on offering and enhancing innovative investment solutions that holistically address retirement challenges, leading to better outcomes for our clients and ultimately society at large.”

Case study

How Retirement Income Investment Integrator boosts a client’s annuity income

Sarah invests R5 million into Discovery’s Linked Retirement Income Plan in Discovery’s Funds. She is on Vitality Bronze status and makes 3% income withdrawal. She will therefore receive a 35% boost in addition to her income every month. Over a 10-year period at 8% investment growth, assuming she maintains her Vitality Status, she would earns R652 898 in extra income through boosts alone from the Retirement Income Investment Integrator.

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