Retirement plans falling off the cliff
Most South Africans’ retirement planning is still in disarray and could even be getting worse, two new surveys indicate.
One of the surveys found that only four percent of pensioners are confident that their retirement savings will not have been depleted by the time they die.
The two surveys are:
* The fourth annual Old Mutual Retirement Monitor, which involves 1 180 face-to-face interviews, including with pensioners; and
* A study by Alexander Forbes of the behaviour of the 201 369 members and the 644 participating employers of its umbrella fund.
The difference between the two surveys is that Old Mutual’s Retirement Monitor is based on the opinions of the people who were interviewed, whereas the Alexander Forbes survey is based on the financial behaviour of people who belong to the country’s biggest umbrella fund by asset value and fourth-largest by membership.
The Alexander Forbes survey shows that most members of its umbrella fund will probably receive a pension equivalent to less than 20 percent of their pre-retirement salary, while only six percent of members may receive a pension equivalent to more than 60 percent of their pre-retirement salary.
The company concedes it is possible that many of its umbrella fund retirees have a significant portion of their savings in their previous retirement fund, although the fund’s experience of its members’ failure to preserve their savings when they leave a fund before retirement makes this unlikely.
Most members can expect to receive a low pension despite an increase in the average contribution rate, from 13.6 percent to 14.68 percent of pensionable income, over the past three years.
The higher contribution rate is a result of members saving more, as well as decreases in administration expenses and the cost of group risk life assurance.
Based on the fund’s current average contribution rate and investment returns, a member who is 20 years old now can expect to receive a pension that is 58 percent of his or her pensionable salary on retirement at age 60. If the 20-year-old retires at age 65, the member can expect a pension that is 78 percent of his or her pensionable salary.
If the member changes jobs between the ages of 20 and 29 and fails to preserve his or her retirement savings and then resumes saving at age 30, the member can expect to receive a pension that is about 40 percent of his or her salary if he or she retires at 60.
Targeting a pension that is 80 to 100 percent of your pensionable income at retirement will enable you to maintain your pre-retirement standard of living and help you to meet the rising cost of health care when you are retired.
Alexander Forbes cautions that you must take into account that your retirement fund contributions are based on your pensionable salary – not your gross take-home pay, which may include allowances such as a car allowance. This means that, if you are targeting a pension that is 100 percent of your pensionable income at retirement and your pensionable salary makes up 50 percent of your take-home pay, your pension will be 50 percent of your gross salary at retirement. And, if you are targeting a pension that is 50 percent of your final pensionable salary, your pension will be only 25 percent of your gross income.
The Alexander Forbes survey shows that many fund members continue to make the same fundamental mistake: they do not preserve their retirement savings, particularly when they are younger.
And this failing is being compounded by the uptick in the rate at which people – again, mainly those who are younger – are changing jobs and withdrawing their savings from the fund (see graph, link at the end of this article).
Alexander Forbes says that most pre-retirement withdrawals are because of fund members resigning from their jobs.
The previous survey, three years ago, found that, across all age bands, the average exit rate from the fund was 12 percent a year. The average exit rate is now 16 percent a year.
Alexander Forbes says the increase could be because the economy is recovering. The previous survey was carried out in the aftermath of the economic recession, when unemployment was high and most people who had a job stayed in it. Employee mobility has since started to increase.
The average rate of preservation has dropped over the past three years, from 8.58 percent to 7.79 percent, and the rate is close to zero for members in the 20-to-25 age group, the survey found.
Alexander Forbes says the low rate of preservation could be linked to South Africans having a large amount of debt: many people use their retirement savings to pay off or reduce their debt when they change jobs.
The finding that most fund members do not preserve their retirement savings is supported by the Old Mutual survey, which shows that 61 percent of members who changed jobs in the past 15 years withdrew some or, in most cases, all of their retirement benefits in cash.
Lower-income members are more likely to take their retirement benefits in cash when leaving their fund before retirement.
Old Mutual’s survey found that, of the pensioners interviewed:
* 45 percent believe they will run out of money in retirement;
* 24 percent continue to work in retirement to make ends meet;
* Only 7.2 percent are satisfied with their financial situation;
* 37 percent rely (at least in part) on financial assistance from members of their family;
* Only 28 percent feel that their pensions have kept pace with inflation; and
* Only 14 percent bought a pension at retirement – the rest took their savings as a cash lump sum.
The Old Mutual survey shows that people aged 55 or older who are employed and belong to employer-sponsored retirement funds are waking up to the fact that they have not saved enough for retirement when it is too late. Often, the reason for the shortfall is that these members are badly informed about how much they have saved for retirement compared with what they will actually need.
Of the pre-retirement interviewees, the survey found that:
* Only 6.79 percent are satisfied that they are prepared financially for retirement;
* Only four percent are confident that they will have saved more than enough for retirement;
* 36 percent believe they may have saved enough;
* 26 percent think they will be “a bit short of funds”;
* 19 percent say they will be “very short of funds”;
* 46 percent are not sure of how much they have saved for retirement; and
* 35 percent expect to continue working after retirement, of whom 94 percent say they will have to do so for financial reasons.
Karabo Morule, Old Mutual Corporate general manager of member solutions, says the finding that 46 percent of respondents are unsure of how much they have saved for retirement is a cause for concern, because it is clear that members’ responses are based on their beliefs about their retirement investments and not on actual information. It can therefore be assumed that any optimism among pre-retirees about their retirement savings may well be based more on feelings than on fact.
The problem is compounded by the fact that many retirement fund members do not even know what their current accrued benefit is.
The survey found that 94 percent of members who earn more than R40 000 a month receive annual benefit statements that show their accrued savings, but the figure drops to 61 percent among members who earn less than R3 000 a month.
And, Morule says, fund members who do receive benefit statements often fail to read them. Only 32 percent of members who earn less than R3 000 a month say they “always read” their statements, compared with 66 percent of members who earn more than R40 000 a month.
EDUCATION IS A PRIORITY
There is a serious need for retirement funds and employers to educate their members and employees about retirement planning.
Karabo Morule, Old Mutual Corporate general manager of member solutions, says the Old Mutual Retirement Monitor shows that only 52 percent of the fund members who were interviewed said they had been told how much they need for retirement compared with what they have saved.
And 52 percent of the interviewees said they were not informed, or were poorly informed, about what they should do with their retirement savings when they retire.
Just under 20 percent of pre-retirement respondents have never heard of annuities (pensions) and 28 percent have heard only a little about them, Morule says.
“Members are lacking the crucial information they need to make informed and sustainable financial decisions, not only during the savings phase of their lives, but also on and in retirement. Funds urgently need to provide more relevant support for members during all stages of retirement saving,” Morule says.
Alexander Forbes says that education needs to go beyond retirement planning. Employers and funds must introduce workplace financial wellness programmes that also teach members how to manage their debt.
The programmes need to educate employees about how their decisions will affect their ability to retire financially secure. For example, members need to know how much they will have saved if they preserve their retirement savings, compared with the impact of withdrawing their savings before retirement.
Both Old Mutual and Alexander Forbes say that retirement funds should consider introducing default annuities for their members when they reach retirement. They point out that National Treasury, in its retirement reform discussion papers, has recommended default annuities.
If you want to have saved enough for retirement, Alexander Forbes recommends that you:
* Start saving for retirement from your very first pay slip.
* Increase your contributions, particularly when you receive salary increases as you approach retirement.
* Retire later. You can increase your pension by 15 percent if you retire two years later than your normal retirement age.
* Preserve your savings when you change jobs.