As average life expectancy increases, it’s more important than ever to start saving for the future, writes Johann Barnard
The job for pension fund managers to plan for 30 years into the future is not an easy one. And it becomes increasingly fraught when one considers the shifting goalpost created by their clients’ longer average life expectancy.
Retirement years are now almost as long as working-age years. Naturally, investment strategies and the ways in which retirement products are structured have adapted as a result.
Longer average life spans also offer the opportunity to work for longer, and therefore to put those productive years to good use by saving in that time.
But even if investors work and save for longer, future returns are likely to be more muted than they were in the period leading up to the global financial crisis. Many veteran investors will look back longingly to a little more than a decade ago, when the commodities boom was propelling the local market to record annual returns upwards of 20%.
“The returns SA investors experienced in the decade preceding 2008 were abnormal relative to long-term, international returns on equity,” says Allan Gray’s Daniel van Andel. “While we don’t know what the future holds, odds are against us seeing those sustained levels of return again any time soon.
“The most recent decade tells a different story. SA equities have returned no more than 10% on an annualised basis over the period, which is a more normalised view of equity returns.”
Van Andel points out that periods of such strong growth should not be included in projections and modelling. “When determining how much to save for retirement, a more prudent assumption is a real return of 4%-5% over the long term. “Anything more than this should be considered a bonus,” he says.
Reviewing the state of the pension fund industry, Van Andel says one of the biggest indicators of health is in the inflows. The first quarter of 2018 has delivered decent inflows after a slight hiccup in 2016 and 2017, when fund inflows slowed by 11% and 12% in nominal terms respectively.
He says recent industry reforms show positive signs, with the regulator focused on promoting greater guidance, transparency, flexibility and simplicity.
“The effective annual cost standard introduced in 2016 is an example of a good measure which has been introduced in the retail space to enable investors to understand and compare the fees they are paying on their investments. There is great value in being able to easily compare fees payable across providers and identify when you as an investor are paying more than you should be,” Van Andel says. “A retirement product should be a simple, understandable, good value for money offering which investors can easily use to achieve their retirement goals.”
Measures such as this, which foster a sense of transparency and control, will be important in encouraging savers to contribute to, and supplement, their workplace pension fund.
This is a mental hurdle that no-one has yet been able to completely conquer. Human
“When determining how much to save for retirement, a more prudent assumption is a real return of 4%-5% over the long term. Anything more than this is a bonus
nature is to put off what can be put off, and retiring from work many decades in the future seldom carries the sense of urgency it deserves.
The discipline of contributing to a monthly pension fund is difficult enough to swallow without then having to worry that even that will not be enough to secure a comfortable retirement.
A recent survey by Old Mutual on millennials’ savings and investment preferences shows higher numbers of this cohort are investing than are older generations. Nearly a quarter of respondents are invested in a unit trust, against only 2% of older generations. A greater proportion (35%) are also saving money to pay back debt, compared with 13% of older South Africans.
Though these numbers are encouraging, Andrew Davison, head of advice at Old Mutual Corporate Consultants, says the big challenge is to develop this culture of saving for emergencies while also investing for retirement.
“If you neglect the shortterm savings, you get the situation where people need money for short-term needs, so [they] cash in their retirement savings when they change jobs,” says Davison.
Getting people to change their view of retirement is crucial. To do this, he says it is helpful to consider retirement savings as deferred income that you will draw on in retirement. People should divide their adult life into two periods: the time when they are working, and the time when they are no long working.
They need to hold back some of the income they earn today to use in the future. ●
Andrew Davison … Save for retirement, but don’t neglect short-term savings