Re-engineering retirement plans for better outcomes
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JOHANNESBURG - Most retirement fund members will face serious problems at retirement, unless employers, retirement fund trustees and financial advisers focus on key levers to improve the probability of better outcomes.
Katherine Barker, the head of the Momentum FundsAtWork, says South Africans are not saving enough for retirement. Currently, because so few members preserve their savings when changing jobs, the average member faces a pension of less than 10% of the salary they will receive just before retirement. For many, this percentage, known in the industry as a replacement ratio, equates to a monthly retirement income of less than R2 000.
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 replacement ratios at retirement under even more pressure.
Barker says the recently implemented default retirement regulations, which try to "nudge" members towards better-value-for-money investment options and encourage them to remain invested, should help to improve retirement incomes.
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She also believes that the cost of implementing these regulations and the additional trustee responsibilities they introduce will accelerate the move to umbrella funds. Umbrella funds cater for a number of employers under a single "umbrella", as opposed to stand-alone employer-specific funds. This is a good thing, according to Barker, because 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, and they need to be flexible enough to accommodate members’ different needs. She says a good starting point is greater flexibility in contribution levels. This involves giving members the ability to increase their contributions or make additional voluntary contributions towards retirement savings.
South Africans change employers every five years, on average, and about 90% of people cash out their retirement savings in the process. Barker says 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 R8 000.
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. “Outcomes-based investing results in a smoother investment ride, mitigating the risk that a sudden market fall at retirement will severely reduce capital."
She says: “Given the magnitude of the current retirement-savings gap, achieving desired outcomes may appear daunting. However, smart re-engineering, which pulls some key levers, can improve replacement ratios significantly.”
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