Treasury’s new regulations for retirement funds, which come into full effect in March next year, require funds to, among other things: have default investment strategies in place for pre-retirement savings, with members also able to select “non-default” investment options; offer clear communication and counselling to members, particularly when they join a fund and when they leave it; provide trustee-endorsed “default” options for preserving their savings when they exit a fund on changing jobs; and provide trustee-endorsed annuity options when they retire.
Although it is too early to tell for sure, the signs are that, among funds that already have trustee-endorsed strategies in place, members are more likely to preserve their savings than take cash when changing jobs.
This is the view of John Anderson, group head of client solutions at Alexander Forbes, who spoke to Personal Finance on the launch of the company’s 2018 Member Watch survey of members in the retirement funds under its administration.
The survey was based on data collected from the about onemillion active retirement fund members.
It shows that contribution rates have remained relatively constant over the past six years. The average rate for 2018 is 14.11% of pensionable salary (with the employer contributing 9.15%, on average, and the employee contributing 4.96%) with a net contribution (after group risk cover and costs) of 12.17%.
This is well below the savings rate of 20% of your income typically recommended by the industry.
Anderson says the recommended rate has been increased from the original rule-of-thumb figure of 15% because the industry expects the current low-return investment environment to continue, your savings need to keep pace with salary inflation (in most cases higher than normal inflation) and people are living longer in retirement.
If you save 20% of your income over a working career of 35 to 40 years, you will probably be able to retire with a pension of about 75% of your final salary.
This percentage of salary is known as your replacement ratio.
Along with not saving enough, the biggest factor affecting outcomes is the widespread lack of preservation: people wiping out their savings when they change jobs by taking their retirement benefit in cash.
The Member Watch survey shows that replacement ratios and preservation rates remain dismally low in South Africa. The average projected replacement ratio of the active members surveyed was 40.5%, while the actual ratio achieved by retiring members was 28.8%.
And of the people exiting funds in the 2017/2018 year under review, only 8.7% preserved their savings. This is down from 11.5% in 2012 (see graphs above).
But there are signs of a turnaround, largely because of Treasury’s interventions, but also through system improvements and innovations effected by players such as Alexander Forbes.
Anderson says that contrary to widespread belief, many people take cash when they exit a fund simply because it’s the easiest, least cumbersome thing to do, rather than because they actually need the money. In the past, he says, it has often been more of a hassle to preserve than to take the cash, because of the extra work involved for the member in the way of filling in forms and arranging the transfer into a preservation fund.
But funds, particularly the larger ones, are now making it far easier for people to preserve. In fact, preservation is the stipulated default option under the new regulations, and you will have to make a more active decision to take cash.
Anderson says there is evidence that where funds have put solutions in place to make it easier for exiting members to preserve their savings, preservation has gone up, and by March next year this trend should be more visible. He says Alexander Forbes has tried various means to encourage people to preserve, including improving communication and fostering member education, “but this is the first time in 10 years we are seeing something that tangibly improves preservation”.
Another player in the retirement fund space, Momentum, is seeing improved outcomes after implementing its Smart Exit strategy. Regard Budler, head of product solutions at Momentum Corporate, says: "The Smart Exit strategy created for Momentum FundsAtWork helps employees to digitally manage their financial wellness when they leave their employer and helps members approaching retirement to understand the different annuity options available and make an informed decision.
“Since implementing Smart Exit, we have seen the preservation rate increasing to 22%, more than five times higher than other claim types, which average 4%,” he says.