Can we use employee benefits to save for more than just retirement?
Only 4.7 percent of retirement fund members who retired in 2015 had enough retirement savings to provide them with an income or pension of 75 percent or more of their final salary, Alexander Forbes, South Africa’s largest retirement fund administrator says. This and other dismal statistics about our poor retirement savings rate and unwillingness to preserve our retirement savings got Alexander Forbes thinking that it might not be a good idea to convince us to focus solely on saving for retirement.
Releasing the Employee Benefits Barometer, its annual survey of retirement funds in presentations to trustees and employers around the country this week, senior Alexander Forbes executives asked them to consider whether South Africans would be more motivated to save for the long term if the benefits offered by employers could be extended beyond just saving for retirement.
The truth is that employers and the retirement industry are not succeeding in persuading us to save for retirement, Anne Cabot-Alletzhauser, the head of Alexander Forbes’s research institute, says.
If our employers allowed us to choose how much of our salaries should be pensionable or how much to contribute to a retirement fund, we would choose the lowest amount, because we need the money to survive from one day to the next, she says.
Cabot-Alletzhauser says many retirement fund members do not see retirement as their priority because they do not expect to live beyond 60. According to StatsSA, in 2015 the average life expectancy in South Africa was 60.6 years for men and 64.3 years for women.
In addition, trust in the financial services sector and the government is low, she says.
Year after year, the retirement industry urges people to save, but the message is ignored, Cabot-Alletzhauser says. “It’s time to come up with a better idea.”
The government is looking for a better social protection plan and employers want to provide good employee benefits, but when it comes to participating in the provision of these benefits, employers are bowing out and outsourcing the role, and employees are clocking out, she says.
Employers are providing benefits without assuming liability for providing pensions: they are moving employees out of funds that provide a predetermined income in retirement to ones that provide a lump sum at retirement that members must use to buy a pension.
Many are also choosing not be involved in running stand-alone retirement funds and are shifting employees to umbrella funds, typically sponsored by financial services companies and served by independent or sponsored trustees.
Cabot-Alletzhauser says your retirement fund is probably your most important savings vehicle, but many members do not understand its power.
Last year, the research focused on how retirement funds could ensure that we remain committed to saving by providing support at the workplace to help us achieve financial well-being.
But Cabot-Alletzhauser says it is not possible to train the entire financial services industry to focus on financial well-being. So Alexander Forbes looked around the world for inspiration and found it in the Singaporean retirement-funding model.
When Singapore became independent 40 years ago, it set a goal of making people more fiscally responsible without introducing a welfare state, she says. It found it was possible to teach people fiscal responsibility by giving them access to their retirement savings to buy assets and services that would ultimately develop the country and give them access to greater wealth.
Singapore made it compulsory for employees and employers each to contribute 20 percent of the employees’ income to long-term savings, and allowed them to access these funds to pay for housing, education and health care.
Cabot-Alletzhauser says the result is that 40 years later Singapore has one of the highest financial literacy rates in the world, the third-highest rate of saving and one of the lowest levels of debt.
Alexander Forbes engaged Ayabonga Cawe, an economist and the co-founder and chairman of the non-profit organisation Rethink Africa, to conduct research among members of the funds it administers to find out what goals would persuade them to commit to saving for the long term. The research found that members ranked cover for funerals as their top priority and receiving a lump sum at retirement second.
Receiving an income in retirement was their lowest priority, featuring after having an emergency fund, buying or building a house, paying for education and paying for health care, he says.
Michael Prinsloo, the executive head of institutional research and product development at Alexander Forbes, says the administrator did some calculations to ascertain whether it would be possible to fund other expenditure from retirement savings without hiking contributions or significantly reducing what members could save by the time they reached retirement.
He said the calculations started with a member whose total (employee and employer) contribution to a retirement fund is 12.5 percent of his or her annual nett income of R72 000. The member contributes from age 23 to age 63, with group life and disability benefits taken care of separately by the employer. Assuming this person received inflation-related salary increases throughout the 40-year period and did not make any withdrawals from his or her retirement savings, he or she would retire with savings able to generate an income in retirement of 50 percent of his or her salary.
Prinsloo says if this person was expected to contribute to an emergency fund, to pay off a R250 000 house by age 43, and to fund the schooling at R29 000 a year and the tertiary education at R50 000 a year of two children, he or she would have to save 60 to 80 percent of his or her income, depending on the assumptions used. It was obviously not feasible to expect South Africans to contribute at such a high level.
Alexander Forbes calculated, however, that if a life-stage approach were used – more of the contribution meets immediate needs when you are younger and more is used to fund retirement when you are older – a member who contributed 46 percent of his or her income would be able to save enough to meet all these goals and retire with an income in retirement of 51 percent of his or her final salary. Prinsloo says if you add up what you spend on education, housing, emergency and retirement savings, you would probably reach a percentage close to 46 percent, but this could still prove unaffordable for a member on income such as R72 000 year.
The contribution level could drop to 20 percent if the education of employees’ children was subsidised by the employer, he says. And saving through an employee benefits scheme could provide cost-efficiencies if the scheme were mandatory for all employees, he says.
Wouldn’t it be better if 50 percent of South Africans saved enough to provide an income in retirement equal to 50 percent of their final salary than the current situation where only five percent of members save enough to provide a retirement income equal to 75 percent of their final salary, Prinsloo asks.
We need a new employee benefits model that meets some key social protection needs, he said.
Prinsloo says the objective of a retirement-funding system is to enable people to retire with financial security. The Benefits Barometer argues the case for meeting our needs for housing, the education of our children and savings for emergencies as a way of contributing to our financial well-being in retirement.