In today’s newsletter we take a look at the findings and trends coming out of the latest Old Mutual Retirement Funds Survey. The findings were presented yesterday in Johannesburg and they show awareness of retirement issues, but also some less than favourable realities. And while these may be concerning – at least we know what they are. Service executive at Old Mutual Corporate, Mkuseli Mbomvu gave the following quote yesterday – a problem well defined is a problem half solved. At one glance the facts and figures, perceptions and realities around retirement in South Africa look like a huge problem. Throw that glass out – and it becomes obvious that this is also an area of immense opportunity.
The Money Marketing Newsletter will be participating in the long weekend coming up and will not be appearing next week. We wish you all a very safe long weekend that is filled with happiness and relaxation.
Retiring financially independent
6% of South Africans retire financially independent. Craig Aitchison, MD of Old Mutual Actuaries and Consultants says we need to look at this as these 6% being able to retire with no change in standard of living.
A quarter receive assistance from family members
In the Old Mutual Retirement Monitor, 53% of pensioners surveyed felt a drop in their standard of living when they retired and 25% said this drop was a big one. Only 17% felt that their pension had kept up with inflation, 51% said it was a bit behind inflation and a third felt it was far behind inflation.
On average – pensioners said that their pension meets 77% of their retirement needs. 23% currently receive financial assistance from their children or other family members – and this assistance amounts to almost a quarter of their monthly income.
These are the findings of the first Old Mutual Retirement Monitor, which examines pre-retirement perceptions amongst working South Africans. The Monitor also surveyed pensioners.
(The Old Mutual Retirement Monitor and Old Mutual Retirement Survey are two different research projects. The Old Mutual Retirement Survey aims to understand changes in the retirement industry and looks at a range of issues from perceptions of the industry, governance, types of funds and investments and communication to fund members. The Monitor surveyed primarily working metropolitan households and the Survey collected data from funds, government, media and industry bodies, trustees and intermediaries.)
Where the money comes from
While the pensioners surveyed in the Monitor on average said that 77% of their pension meets their needs, those in pre-retirement and saving for retirement with a pension fund said that they expected 60% of their post retirement income to come from a pension. Other sources include retirement annuities, cash savings, endowments and other income (eg working after retirement part time). Of those who are not members of a pension/provident fund they expect 48% of their retirement income to come from cash savings.
One of the emerging trends that the Old Mutual Retirement Fund Survey found was a move to a later retirement date. In South Africa, Seelan Gobalsamy, MD of Old Mutual Corporate, says that we are starting to see people asking the question about retirement date and age. People are retiring – and then in some cases contracting back or entering the SME market. Supplementing income in retirement was also borne out in the Monitor findings – where pre-retirees expect some funds to come from other sources including working – and those who don’t belong to a pension fund are probably more likely to work for longer.
When it comes to retirement from an individual perspective – the ultimate goal is to make sure the money outlasts the individual.
So is there enough to retire on?
The Survey found that only 43% of members think they have enough to retire on. Not enough funds measure adequacy – the Survey found that only 52% of funds measure adequacy.
Preservation does not happen
Preservation remains almost non-existent – 93% of those interviewed in the Survey agree that preserving retirement savings is important – but 99% of those that exited Old Mutual Umbrella Funds last year did not preserve. And while often, cash is needed when employment ends (particularly noteworthy in South Africa where unemployment is such a problem); the survey found that there is a higher level of awareness around the cash option when leaving a fund rather than preservation, and a lack of understanding of the consequences of not preserving. Intermediaries who responded in the Survey are one of the keenest proponents of preserving.
Communication and understanding of the retirement issues
One of the most notable points to come out of the findings was the low level of member engagement on funds and awareness of the issues.
While communication with members was highlighted as an ongoing trend – it seems that this is an area where we still have a long way to go. The Survey found that communication to members was still largely printed material and that despite the continued emphasis on communication; there were still low levels of understanding. Hugh Hacking, Umbrella Fund product manager at Old Mutual Corporate says that an increasing number of funds have recognised the shortcomings of relying on written material and in line with member preference – personal communication (like workshops) is more popular.
This was also evident in the Monitor findings.
The Monitor found that pre-retirees are largely unaware of the trustees of the fund, the investment managers and types of assets the fund invests in.
Only 20% know the trustees by name, 30% know which company the trustees are from. Only 15% voted in the most recent trustee election. 45% know who manages the investment but only 24% claim good knowledge of where the assets of their retirement fund are invested. (18% are vague and 58% don’t know where the assets are invested.)
Despite this low level of engagement there is a high level of trust and confidence in trustees. On a scale of 1 – 10 where 10 is completely confident – both trust and confidence score 7.3. (the trustees are making decisions in the interests of the members and that members are confident in the abilities and knowledge of the trustees). Aitchison says this is more a confidence in the office of trustee – so members view a trustee, by virtue of being a trustee, as acting in their best interests.
The levels of knowledge become more disturbing - 65% of those surveyed in the Monitor don’t know what percentage of their salary they contribute to their retirement fund. (67% contribute less than 10% of their salary to a retirement fund each month.)
Member communication and knowledge is clearly an area where there is massive opportunity. From the findings it would be logical to deduce that current member communication is having very little impact. If only 15% of members are voting for trustees and various findings show that knowledge around retirement funds are limited at best, the need for clear, new, innovative and professional financial education at all levels is evident. We need to ask questions that go right back to basics. Financial education has never been so important.
Questions to ask:
Do you belong to a retirement fund, what is this fund, where is it invested, who are the trustees, how are investment decisions made, who makes these decisions, what do they base their decisions on, how do they know what your needs are? And if you are not in a fund ask the same questions – of your current financial plan (or get a plan). If you are invited to a workshop or presentation on the pension fund – go. When you need to vote for trustees ask them who and what they are and how they will manage the fund.
It is good that we are saving for retirement. It is not good that we don’t know enough about it.
Start out from a basis of knowledge and responsibility
Retirement is a long term liability. As important as it is to minimise short term debt, it is even more important to provide for long term debt. It is not easy providing for retirement, we have to save a lot (even with the latest rate cut), and it will involve sacrifices. It is a responsible action and it is an individual responsibility.
The retirement landscape has changed enormously in a short space of time. Defined benefit has given way to defined contribution, (and it seems from the surveys that knowledge on this is also sketchy) and we have dramatically increased our life expectancy (often with a higher associated cost). We also have to deal with the spectre of inflation.
Rightly or wrongly funding for retirement has become the individual’s responsibility.
The Monitor findings show that there is still a perception that someone else (eg state) will provide. This is unlikely (and is even more unlikely to be sufficient). We have to provide. We cannot outsource our future to someone we think will do a good job – we have to ask the questions and find the information to make sure that the best as is possible is done.
The responsibility shift to the individual has not meant that the industry has become more understandable to the individual. There is an awareness of the need to and the importance of saving for retirement – but the intricacies and details have not reached the individual. This is a responsibility we all need to take. As members and savers we need to speak up.
Become a difficult member and consumer
Ask every question you need to until you get an answer you understand and are satisfied with.
Be aware of investment returns – and that investment returns while an important part of your goal are not your goal. The goal is to retire financially independent.
Make sure that at least five years to retirement you have as comprehensive a review as possible and start looking at your objectives and options on retirement from funds and other investments – what kind of an annuity are you looking to buy, how much should you derisk and into what investments, can you keep investing if there is supplementary income, what are the inflation expectations and how will they affect in the long and short term.
While retirement may not be a certain future for all of us - it is a certain and long future for a lot of us. Just as avoiding tax is a very unwise thing to do – so too is avoiding the retirement issues.
The opinion and comment in this newsletter is opinion and comment only and does not constitute financial advice in any way – please consult a professional adviser for all retirement and investment needs.
Source: Money Market Newsletter (no: 250310)