Most retirement fund members will face serious problems at retirement, unless employers, trustees and their financial advisers focus on key levers to improve the probability that members will reach their desired retirement outcomes.
Katherine Barker, Head of the Momentum FundsAtWork, says South Africans are simply not saving enough for retirement. Assuming the current low levels of preservation when changing jobs persists, the average member faces a retirement income which is less than 10% of the salary they will receive just before retirement. For many, this equates to a monthly retirement income of less than R2000.
The Momentum/Unisa Consumer Financial Vulnerability Index for the third quarter of 2017 shows that South Africans are more financially vulnerable than ever. This, coupled with South Africans’ poor savings culture, places income replacement ratios at retirement under even more pressure.
Barker explains that the recently-implemented default retirement regulations, which try to ‘nudge’ members towards better value for money investment options and encourage members to remain invested, should help to boost retirement incomes.
She also believes that the cost of implementing these regulations and the additional trustee responsibilities they introduce will accelerate the move to umbrella funds. This is a good thing, according to Barker, as the inherent cost-efficiencies and flexibility of umbrella funds can potentially increase replacement ratios significantly.
However, Barker says, “Umbrella funds need to remember that the “average member” doesn’t exist. It’s important for these retirement funds to offer the flexibility required to ensure solutions can be tailored around members’ different needs. Pulling the levers that will improve replacement ratios and deliver each member’s desired retirement outcomes should be a key focus for those in retirement fund management.”
According to Barker, a good starting point is greater flexibility in contribution levels. This involves creating the functionality for members to automatically increase their contribution rate annually or make additional voluntary contributions towards retirement savings. Such an approach enables members to improve their replacement ratio, while deriving optimal value from the tax deductibility of retirement fund contributions.
South Africans change employers on average every five years and around 90% of these employees cash out their retirement savings in the process. Barker says that a ‘smart exit’ process which facilitates informed decision-making when changing jobs, coupled with umbrella fund efficiencies and flexible contributions, can push average replacement ratios up to 50%, which is closer to a monthly pension of R8000.
Barker also believes in the benefits of outcomes-based investing, which puts members’ goals at the centre of an investment process designed to achieve the highest possible returns for the lowest possible risk. Always mindful of managing risk, this approach has the potential to improve replacement ratios by enabling funds to invest more aggressively for the long term.
“Outcomes-based investing also results in a smoother investment ride, mitigating the risk that a sudden market fall at retirement will severely reduce savings for annuitisation. Of course, ensuring that retiring members have easy access to the key information they need to choose the right annuity is another key lever for driving desired retirement outcomes.”
Furthermore, employers and trustees should review retirement and insurance benefits in order to ensure the optimal mix of benefits for achieving retirement outcomes according to Barker. Insurance flexibility that reduces over-insurance facilitates the flow of more money to retirement savings.
Barker says that rewards are a “not-so-obvious” lever for improving replacement ratios. Rewards can be creatively structured to incentivise behaviour that enhances financial wellness, on the road to retirement and at retirement, thereby further boosting members’ retirement savings.
Barker concludes, “Given the magnitude of the current retirement savings gap, increasing replacement ratios to achieve desired retirement outcomes may appear daunting. However, smart re-engineering which pulls some key levers can improve replacement ratios significantly and help deliver the desired outcomes.”