Tack­ling the re­tire­ment chal­lenge head on

Financial Mail - Investors Monthly - - Feature: Retirement Annuities -

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

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