Report: 87% of respondents ‘feel financial stress’
Less than 10% of retirees are able to maintain their preretirement standard of living as a result of undersaving and not preserving their assets, according to Sanlam’s 42nd Benchmark Report. National Treasury estimates only 6% of South Africans can look forward to a comfortable retirement.
The million-dollar question is whether the changes being made to SA s retirement regulations’later
this year will improve this figure or worsen it.
Although SA’s new two-pot retirement system is wellintentioned, Sanlam’s 42nd Benchmark Report points out that it comes with its own challenges. Writing in the report foreword, Kanyisa Mkhize, CEO of Sanlam Corporate, said these include member choice on investment options for the savings pot and a lack of sufficient financial knowledge among most members, which may expose them to the risk of capital loss.
Other countries that have implemented similar systems have had mixed results. Chile launched a mandatory defined contribution plan in 1981 which required formal-sector workers to contribute 10% of their taxable income into individual accounts managed by private pension managers. It became one of the largest and best funded defined contribution schemes in Latin America, holding assets of more than $200bn at the onset of the Covid-19 pandemic. In addition to boosting national savings, the scheme supported Chile’s sovereign creditworthiness.
Sanlam Investments’ Danie van Zyl explains that during the pandemic, the Chilean government allowed workers to access 10% of their retirement savings from July 2020. What was supposed to be a one-off event was repeated in December 2020 — this time requiring individuals to pay income tax on the amount withdrawn, with a third withdrawal allowed in April 2021.
“In total, 66% of account holders made withdrawals during all three withdrawal windows. As account holders with small balances were able to take most of their savings, roughly a third of account holders now had a zero account balance,” he says.
Fund managers had to sell a significant amount of assets to meet the withdrawal requests, leading to lower asset values and liquidity concerns. To provide liquidity, Chile’s central bank bought government bonds on the secondary market. Increased household and consumption spending and the depreciation of the peso resulted in an increase in inflation which combined to contribute to Chile’s credit downgrade.
Malaysia also has a two-pot system in place. Like Chile, the Malaysian government decided to expand the circumstances under which members could dip into their retirement savings during the pandemic. In total, 8.1-million Malaysians made withdrawals from their pension funds over the course of four rounds of withdrawals allowed during the pandemic.
CONSEQUENCES
The consequences on workers’ retirements savings has been alarming. In 2023, Malaysia’s central bank warned that the average Malaysian is at risk of running out of retirement savings 19 years before their death. It is estimated that the majority of members have been left with insufficient savings to live above the poverty line after retirement. Economists have called it the worst policy the country has ever implemented.
Sanlam’s Benchmark research revealed 63% of South Africans are anxious about their finances with 87% saying they feel financial stress and 46% admitting they struggled to meet basic monthly needs such as food and rent. One in five said they did not believe they would ever be able to retire.
It’s perhaps no surprise that 21% of respondents said they would consider withdrawing funds in an emergency, 13% said they were keen to access a portion of their benefits and 8% said they would probably take advantage of the new system. Only 23% said they wouldn’t touch their savings at all.
For SA to avoid similar outcomes to Chile and Malaysia, the onus will on the retirement fund industry to educate members on what the implications of a withdrawal will mean for their long-term retirement savings.