Pretoria - The trend to allow talented newcomers to the labour market to contribute as little as possible to pension or provident funds in an effort to retain them may create a "deferred dependency problem".
Although the so-called Z-generation is highly confident about the way it is managing its finances, its savings objectives are aimed at addressing materialistic needs.
Old Mutual's savings and investment monitor for last year shows 84 percent of the respondents to their survey saved to buy electronic goods, 63 percent saved for home appliances and 12 percent saved to buy property.
Gen Z is global, social, visual and technological. It is the most connected, educated and sophisticated generation ever. Its members are the early adopters, the brand influencers, the social media drivers, the pop-culture leaders
Deloitte Associate Director Jaco la Grange says although this younger generation are members of a pension or a provident fund, they prefer to be the "masters of their own future".
Companies have realised that they have to be more flexible in their approach to retain this generation. The financial sector has amended the rules to allow employers to contribute as little as 2.5 percent of their remuneration or taxable income to a retirement fund.
La Grange says there are saving options, but the choice how to invest is increasingly left to the employee. Companies do not want to be seen as paternalistic or prescriptive to the new and highly mobile generation.
He says it is still not clear whether members of this younger generation are, in fact, saving sufficiently at the start of their careers.
According to the 2015 Old Mutual savings and investment survey, 37 percent of the survey participants with a monthly salary of between R6 000 and R14 000 do not belong to a pension or provident fund.
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The average income of the Gen Z participants in the Old Mutual survey was R8 900 per month. According to the survey 33 percent of this generation would invest in short-term savings if they received a bonus of R10,000. Only 16% would invest in long-term or retirement savings.
The survey also found (not only in terms of Gen Z) consumption and living expenses as a percentage of income increased from 57 percent in 2011 to 68 percent in 2015. Savings decreased from 18 percent to 15 percent in the same period.
Efforts made
Beatrie Gouws, associate director at KPMG, says government has made some efforts to encourage savings in terms of retirement reforms.
She says it remains beneficial to invest in retirement funds, however there are few aspects to take into account. This includes the ability to choose how much to contribute to the fund, being aware of the expected growth, the cost and fee structure of the fund, and what the investment strategy is.
"Most people tend to think these issues are not their problem once they have shifted the decision-making to the trustees of a fund."
The biggest benefit from a retirement fund contribution in an employer-employee relationship is that people are forced to save, even if it is only a small percentage of their income.
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Gouws says there is no tax payable on the growth of the fund while the employer is contributing to it during his working life. "This can mean a 30-year tax deferral on capital growth."
La Grange, also chair of the South African Institute of Tax Professionals' personal income tax committee, says companies are competing with each other to create flexibility in their "suite" of offerings to attract young talent.
He says many companies offer different options for their employees to save, but they are less likely to be prescriptive of the amount of savings that would have been the case a few years ago.
"This does mean that savings are being watered down because of the younger generation's need for a bigger take-home pay."
La Grange says, if one considers the fact that people can get a 27.5 percent tax deduction for retirement fund contributions, a contribution of 2.5 percent does not take advantage of the potential of compound annual growth.
The Old Mutual survey showed the number of participants who think their children should look after them in old age increased from 26 percent in 2010 to 41 percent last year.
Additional sources: http://generationz.com.au/characteristics
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