Retirement funds are paying more attention to your financial situation when you retire, such as aligning your contributions with a pension that will allow you to maintain your lifestyle in retirement, according to the latest Sanlam Benchmark Survey on employee benefits, released recently.
The 2018 survey of stand-alone funds and participating employers in umbrella funds shows that 67% of stand-alone funds have a stated target pension (usually expressed as the net replacement ratio) that the trustees actively work towards, as against 48% in 2016. For umbrella funds the figures are lower: 25% as against 29% two years ago.
Of the funds and sub-funds that replied “yes” to this question, 83.6% of stand-alone funds and 72% of umbrella sub-funds have a default contribution rate that is aligned with the target net replacement ratio for members (as against 60.4% and 62.1% in 2016).
The net replacement ratio is the percentage of your final salary that you will receive as a pension, given certain assumptions about your post-retirement investment returns, and most funds surveyed (74.6% of stand-alone funds and 84% of umbrella sub-funds) are targeting a ratio of 70 to 75%, which the industry sees as being sufficient for most people to maintain their lifestyle into retirement.
If you achieve a 75% ratio with your savings, on a final basic salary of, for example, R40 000 a month (the ratio does not take into account additional income such as bonuses or travel allowances), your first monthly pension cheque should be about R30 000.
Retirement funds’ efforts to improve the retirement outcomes of their members are in line with, and may largely be attributed to, the introduction of legislation known as the retirement fund default regulations, due to come into effect on March 1 next year.
But funds can do only so much – the rest is up to the members themselves. When funds were asked what percentage of their members would be able to maintain their lifestyles in retirement, 44% of stand-alone funds and 63% of umbrella sub-funds indicated that less than 10% of their members would be able to do so.
Viresh Maharaj, the chief executive of client solutions at Sanlam, speaking at the Benchmark Symposium held around the country recently, said this indicates that although contribution levels are reasonable, “something goes horribly wrong along the way”, alluding to members withdrawing their retirement savings in cash when they change jobs.
The problem of non-preservation is also being addressed in the default regulations, with the imposed introduction of access to retirement benefits counselling for members who are retiring or changing employers (see “Will your pension fund provide adequate advice when you resign or retire?”)
One fact to come out strongly in the research – and research worldwide supports this – is that most retirement fund members stick with the investment strategy of the fund, or its default option, rather than a strategy in which they can choose the underlying investments.
When asked in what investment options their members were invested, 62% of stand-alone funds and 60% of umbrella sub-funds said that between 80% and 100% of members were in their default options.
Many funds have as their default option what is known as a “lifestage” portfolio (59% of stand-alone funds and 48% of umbrella sub-funds polled). Here, the risk component (the allocation to volatile assets such as equities) is reduced as you approach retirement, so that in the years leading up to your retirement your savings would be less affected by a market crash.
However, this can lead to problems when you retire and purchase a pension, or annuity, Maharaj said. (Funds not already doing so will have to provide members with a default annuity strategy by March next year, according to the regulations.) This is because there may be a mismatch between your pre- and post-retirement investments, especially if you are 100% in cash on the day you retire (41.4% of stand-alone funds and 27.7% of umbrella sub-funds indicated that this would be the case in their default lifestage portfolios).
“We believe that one’s pre-retirement investment strategy should closely align with one’s post-retirement annuity strategy, in order to minimise the risk of a mismatch involving your assets (how much you have accumulated) and your liabilities (the income you need in retirement),” Maharaj said.
He said the research shows that less than half of retirement funds don’t explicitly align the pre- and post-retirement investment strategies, and that before the default regulations come into effect next year, funds will have to re-evaluate their investment and annuity options and make sure they are aligned.
THE ADVANTAGES OF ECONOMIES OF SCALE
Retirement funds, as institutional investors, have relatively low administration and asset management costs compared with the costs of retail products. Economies of scale dictate that funds, which have many millions or even billions of rands of assets under management, can operate at lower cost than individual investors. Equally, large funds are more cost-effective than small funds.
The 2018 Sanlam Benchmark Survey shows that, for most funds, administration costs (which exclude asset management and brokerage costs) are relatively low: 75% of stand-alone funds and 61.8% of umbrella funds reported that administration costs are under 0.5% of total assets under management.
But members of small funds pay higher administration fees than those in larger funds. The survey found that, on average, a member of a stand-alone fund with more than 10 000 members pays half (R34 a month) what a member of a fund with less than 500 members pays (R68 a month).
It is for these reasons that in-fund post-retirement products, such as a default annuity, which your retirement fund will be required to provide by March next year, may prove to be a no-brainer: even a one-percentage-point difference in costs between an in-fund annuity and a retail annuity could make a huge difference to your lifestyle in retirement and to how long your money will last.
When it comes to providing annuities, “big funds using their muscle can actually bring a lot of value for retirees,” said David Gluckman, head of special projects at Sanlam Employee Benefits, also speaking at the Benchmark Symposium. He used the example of someone retiring with a lump sum of R5 million, who could reasonably expect an income of R25 000 a month from that amount. “If you can save one percent a year - and for a big fund a saving of one percent a year is very realistic - that would translate into an extra R50 000 a year or more than R4 000 extra per month, which is a very material improvement to retirement outcomes.”