This is the view of Janina Slawski, the principal investment consultant at Alexander Forbes Investments, and John Anderson, the regional coverage executive of the Alexander Forbes Group, who gave a presentation at the Alexander Forbes Investments Indaba in Sandton last week.
Their vision was of a world “where retirement fund members understand what their retirement will look like, and what they should be doing right now to ensure their income is protected later on; where members feel engaged and have the tools and information to meet their investment goals”.
Why are only 6% of retirement fund members in South Africa retiring with enough to be comfortable, Slawski asks. People are simply retiring with not enough money, and it’s not about poor investment decisions or investment performance. The investment environment may be tough at the moment and in the next few years. But that has not been the case in the past: the markets have provided excellent returns.
So whose fault is it for these poor outcomes? Is it the fault of pension fund trustees? The regulators?
No, she says, it is primarily the fault of the members themselves, who are not sufficiently engaged. They are not involved in their retirement decisions and are not taking responsibility for their retirement journey. They generally don’t read or understand their retirement fund benefit statements and, crucially, they are not preserving their savings when they change jobs, or increasing their contributions when they have the opportunity to do so.
With defined benefit retirement funds, the employer was responsible for providing the employee with a pension. In the migration to defined contribution funds, this burden shifted to the employee.
But Slawski questions whether employees have ever become fully aware of this responsibility and what it entails. In essence, they are not grasping the importance of “getting it right”, she says.
Where to from here?
In looking at possible solutions to the problem, Anderson says the defined contribution model has been an “experiment”, and much has been learned over the past few decades as to what works and what doesn't work.
He says there are certain areas of the retirement landscape where South Africa has done well. Through regulation, effective investment strategies have been put in place for unengaged members, and costs are coming down in the industry, which is providing cost-effective solutions that include passive investments.
There are other areas where the industry has achieved some degree of progress. These include setting replacement ratio goals (the replacement ratio is your pension as a proportion of your final salary), matching investment risk relative to goals, and providing a seamless transition from pre-retirement to post-retirement investments.
He says what we really need to work on more are the “personalisation” of retirement funding; ensuring strategies can respond to both market changes and personal lifestyle changes; and improving communication.
Anderson says the current methods of communicating to retirement fund members have proved to be ineffective. People are often confused by the language used and the way information is presented to them.
Research by Alexander Forbes suggests a new approach is needed - one that combines the best of the defined benefit and defined contribution models, and could best be described as a defined outcomes model.
Such a model, Anderson says, would have the following features:
- It would focus on each individual's goal, which would be to ensure an adequate, inflation-linked income stream in retirement, rather than blindly focusing on investment returns and a capital sum;
- Investment strategies would be personalised - in other words, custom-designed to a member’s unique needs, tracking his or her progress, and tailoring the investments accordingly; and
- Communication would be meaningful and provide practical, actionable information.
He says in cases where these strategies have been implemented, a significant increase in members reaching their income goals has been achieved.
Advances in technology have turned theoretical possibilities into reality, Anderson says. It is now possible for each member to have a customised investment strategy, with feedback in the form of a quarterly assessment, at which point the strategy is automatically adjusted to keep the member on track to meet his or her goal.