Tackling the retirement challenge head on
Retirement savings remains the biggest savings goal for many, and aside from one’s primary residence, it’s often the largest asset one owns.
The challenges are well-known. We are living longer which means more time spent in retirement, and more years that our retirement savings need to last. The numbers show that less than 10% of South Africans are able to maintain the same living standard they had before they stopped working. Industry players have the challenge of developing and improving solutions to meet these changing investor needs and demands.
When changing jobs prior to retirement, many people cash in their retirement savings from their employer’s pension fund. This is often the reason why people don’t have sufficient capital when they retire.
Under a defined benefit (DB) pension scheme, the market and longevity risks lie with the employer, and the retiree is guaranteed of an income for life, whereas with a defined contribution (DC) scheme, members take on the risk of outliving their capital, if not invested properly, or if markets perform poorly. Most people in the private sector are now part of DC schemes.
The introduction of DC pension schemes brought many advantages for investors – they now had a level of control in how their contributions were invested.
Whilst these schemes provide control and choice, on reaching retirement in the DC environment, fund members are required to select an appropriate postretirement income product. There are a variety of retirement income products available – catering for the different needs and circumstances of members. While this choice is important it can be very daunting for members to decide which option or options to choose. So it is crucial that members approaching retirement seek appropriate counselling and advice about the option(s) that will be best for them.
These are the issues the industry has been grappling with – the need to reduce complexity, encourage preservation prior to retirement, and ensure that people have access to information about their options.
These, and other, issues were highlighted by National Treasury in 2011 and we’ve seen a drive by Government and the financial services industry toward improving the retirement income for all South Africans. Regulations to the Pension Funds Act were amended to bring into law many of the recommendations made – such as the default regulations due to take effect in March 2018. Essentially, the default regulations comprise three requirements. Firstly, trustees of retirement funds will be required to offer a default preservation fund for those who resign before retirement. Secondly, they will also be required to offer a default investment portfolio for members of the retirement fund who elect not to choose where their contributions should be invested. Thirdly, there needs to be a default annuity option for members retiring from the fund. Members are not obliged to take up this option and may opt out. However, the fund must make members aware of the option.
Members who are retiring and also those who resign prior to retirement and who elect to withdraw their funds, must be given access to counselling services. Members may transfer the funds to their own retirement annuity for example, but the default preservation option aims to ensure that members are not forced to take their money out of the fund when they resign.
Advice from a qualified professional is invaluable. Glacier’s “Through the Years” commissioned report in 2017 showed that over 80% of participants who felt comfortable that they had enough retirement savings had consulted with a financial adviser. Of those who were unsure that their retirement savings would be sufficient, 75% had not consulted with a financial adviser.
The default regulations will offer members the best of both worlds – the choice remains theirs, but they have the benefit of counselling services.
Although not saving enough remains the biggest risk to a secure retirement, helping those who are employed to preserve their benefits and make the right choices on exiting the funds will go a long way to ensuring a sustainable retirement for members.
Khanyi Nzukuma, Chief Executive of Glacier by Sanlam