Whose (de)fault will it be if South Africans don’t save enough for re­tire­ment?

Sav­ing ap­pro­pri­ately for re­tire­ment is a daunt­ing task and of­ten fund mem­bers be­come ap­a­thetic to­wards re­tire­ment sav­ing. De­fault op­tions have been used to ad­dress this prob­lem, but these also raise other con­cerns.

Finweek English Edition - - COLLECTIVE INSIGHT -

since the late 80s the South African re­tire­ment land­scape has changed sig­nif­i­cantly with the shift from De­fined Ben­e­fit (DB) to De­fined Con­tri­bu­tion (DC) Re­tire­ment funds. In­di­vid­ual fund mem­bers now have to shoul­der the bur­den of sav­ing enough, in­vest­ing ap­pro­pri­ately and se­cur­ing and man­ag­ing their own re­tire­ment in­come. While some mem­bers thrive on all the flex­i­bil­ity and op­tions avail­able to them, many or­di­nary mem­bers find the range of choice be­wil­der­ing. In­stead of look­ing for help, these mem­bers of­ten be­come ap­a­thetic to­wards re­tire­ment sav­ing.

Trus­tees of­ten re­spond to this prob­lem by in­tro­duc­ing de­fault op­tions, from lev­els of con­tri­bu­tions and group life cover to in­vest­ment choice. Although this is a wel­come move in the right di­rec­tion, these de­fault op­tions are of­ten in­tro­duced sep­a­rately to deal with a spe­cific is­sue, with lit­tle or no thought as to how these de­faults form a holis­tic blue­print that guides mem­bers to­wards what is re­ally needed – a secure in­come in re­tire­ment.

In a very real sense this can be com­pared to a team of en­gi­neers over­see­ing the con­struc­tion of a bridge. Im­por­tant de­sign fea­tures are be­ing de­cided on while the bridge is be­ing built, of­ten in iso­la­tion to other de­sign fea­tures. How high or wide should the bridge be, how much weight should it carry? They will fig­ure it out as they are go­ing along. Clearly not the best way of go­ing about build­ing a bridge!

Let us there­fore take a step back and start at the be­gin­ning. You need to have a goal in mind be­fore you set about achiev­ing it. The prob­lem is that few 20-year-olds have any idea of how much they are go­ing to need in re­tire­ment – even ac­tu­ar­ies need to make a host of as­sump­tions to ap­prox­i­mate the amount needed. How can mem­bers save enough if they do not know what enough is?

A gen­er­a­tion ago when many of our par­ents be­longed to a DB-type fund, the fund rules set a re­tire­ment goal for mem­bers that was linked to their salary be­fore re­tire­ment. Trus­tees of these DB funds could rely on ac­tu­ar­ial and in­vest­ment pro­fes­sion­als to ad­vise them on how to en­sure that they meet this goal. This ex­pert ad­vice is not avail­able to in­di­vid­ual DC fund mem­bers, who have var­ied lev­els of fi­nan­cial lit­er­acy, leav­ing them to deal with very com­plex de­ci­sions on their own. Con­sid­er­ing the many mem­ber sur­veys done over the last few years, it seems that many mem­bers would hap­pily em­brace the kind cer­tainty that a DB fund pro­vided.

South Africans are not unique in this re­gard; there have been re­cent dis­cus­sions in the UK about a re­tire­ment fund struc­ture that is a mix be­tween a DB and DC fund. It would tar­get a DB-type fi­nal salary-re­lated pen­sion, but would not nec­es­sar­ily pro­vide any guar­an­tees – hence the pro­posed name: a De­fined Am­bi­tion Fund.

There has been a sim­i­lar move in South Africa to­wards pro­vid­ing mem­bers with some sort of pen­sion tar­get by com­bin­ing all the el­e­ments of fund de­sign to work to­wards this goal. For ex­am­ple, 57% of funds in the 2015 San­lam Bench­mark Sur­vey have taken the bold step of hav­ing a stated tar­geted pen­sion for their mem­bers. Most funds ex­press this tar­get in the form of a re­place­ment ra­tio tar­get­ing a post-re­tire­ment in­come of 70% to 75% of mem­bers’ fi­nal salary be­fore re­tire­ment.

But many of these funds do not stop there; 67% of them have gone fur­ther and have aligned their de­fault con­tri­bu­tion rate with the tar­geted pen­sion. These de­fault

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