New retirement thinking for tomorrow

By Janice Roberts


The issues that keep the retirement industry up at night haven’t changed much over the past four decades. Despite several ‘mini-reinventions’, from investment stage methodology to the life stage model, the majority of South Africans are still dramatically underprepared for retirement.

But the industry remains deeply committed to ‘getting it right’ (i.e. getting more and more people to retire with dignity). In his presentation to the annual Sanlam BENCHMARK Survey, Willem le Roux, Head: Investment Consulting & Actuary at Simeka examined the new thinking and trends that are likely to shape the industry going forward.

According to le Roux, some of the most intriguing disruptive thinking has been put forward by Blake, Wright and Zhang, in a paper titled: Age dependent investing, optimal funding and investment strategies in defined contribution pension funds where members use rational lifecycle financial plans.

“One of their most revolutionary ideas, is to spread an individual’s income as smoothly as possible from the time he or she starts working until death, and includes the radical concept of saving nothing towards retirement until age 35 and then increasing your contribution rate steadily from there on, which leads to a contribution rate of about 35% of salary just before retirement for the average member.

“It is certainly an alternative perspective from current practices, but could bolster confidence among those who get a late start to saving for retirement.”

He shared a second interesting idea introduced in this paper, that of positioning your future salary (essentially your ‘human capital), as an asset alongside your retirement savings – your goal then becomes to convert human capital into investment capital in an optimal way throughout your lifetime. “Your future salary is reasonably predictable and therefore your human capital can be seen as a safe asset. This could be seen as licence to invest your retirement savings fully in risky assets, to offset as it were the conservative human capital. Regulation 28 does not allow you to invest more than 75% of retirement savings in equities, but there are ways to increase your exposure to risky assets. There are a number of other challenges to this model, as it is presented. These include the behavioural difficulty of increasing savings so drastically from age 35, as well as tax deductibility restrictions.

“The requirement to balance retirement savings and human capital confirms the secret to investing, namely that you must address the right risk at the right time – so you invest in equities to address the risk of insufficient returns over the long term, whereas investment strategies nearing retirement should protect the income that the assets can provide after retirement,” he said.

Other new thinking in retirement funding includes a preference for purchasing insured (or guaranteed) annuities upon retirement and converting the entire retirement savings ‘pot’ to this product type at age 76. “At this stage the benefit of being invested in equities is less than the benefit of being in an insured annuity.”

Turning to new trends already underway, he said there had been an extremely positive evolution in focus among retirement fund trustees.

“They have shifted focus from managing funds within the fund rules, to governance frameworks and conservatism, and now, happily, to the outcomes in retirement for fund members.

“This has resulted in employers viewing retirement outcomes as a crucial component in the overall financial wellness offering to their employees,” said le Roux.

“Leading on from this, we’ve seen a noticeable increase in average contribution rates, particularly in the standalone and umbrella fund environment, as employee contributions increased from 6.42% to 7.07%.

“Sanlam’s BENCHMARK research this year showed that just over 60% of standalone funds and 52% of umbrella funds used the life stage model. Of concern is that more than 30% of these funds favour cash at the end stage, a legacy from the 1st-generation ‘life stage’ space. So there is still room for improvement.”

Le Roux said that retirement service providers should constantly review the new thinking and ideas to improve the industry’s success rate in South Africa.

He also noted that many members reach retirement age with insufficient capital. “Anyone who has reached retirement underprepared financially has three choices: purchase a guaranteed annuity and get by on less income; opt for a living annuity and deplete it and then become dependent on family or state; or work longer, enabling the ‘life stage’ model to be delayed by 10 years. Clearly the latter (phased retirement) is the most attractive.”

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