What’s the is­sue with an­nu­ities? Re­cent push­back to com­pul­sory an­nuiti­sa­tion for prov­i­dent fund mem­bers has led to a two-year post­pone­ment in its im­ple­men­ta­tion. Why the re­sis­tance? And how can it be tack­led?

Finweek English Edition - - COLLECTIVE INSIGHT -

af­ter sig­nif­i­cant pres­sure from unions, the South African gov­ern­ment re­lented and post­poned com­pul­sory an­nuiti­sa­tion for prov­i­dent fund mem­bers, due to take ef­fect on 1 March, by two years.

Com­pul­sory an­nuiti­sa­tion would have re­quired prov­i­dent fund mem­bers younger than 55 to an­nui­tise two thirds of their post1 March sav­ings at re­tire­ment. Mem­bers with an ac­cu­mu­lated sav­ing of less than R247 500 per fund at re­tire­ment would not have been re­quired to an­nui­tise any of their re­tire­ment sav­ings.

Given the mag­ni­tude of the op­po­si­tion to this legislation, it is worth look­ing at some of the rea­sons why an­nu­ities are not as pop­u­lar as in­dus­try role play­ers would like them to be, and po­ten­tial ways to ad­dress this.

Prov­i­dent fund mem­bers can cur­rently take their whole ben­e­fit as a cash lump sum at re­tire­ment, ir­re­spec­tive of its size. This es­sen­tially means that many prov­i­dent fund mem­bers hold a large chunk of their fi­nan­cial fu­ture in their hands at re­tire­ment. South Africans’ high level of debt to dis­pos­able in­come im­plies that many South Africans would ben­e­fit from as­sis­tance in man­ag­ing their monthly fi­nances, let alone a much larger amount at re­tire­ment. How­ever, im­ply­ing that grownups would ben­e­fit from as­sis­tance in man­ag­ing their own fi­nan­cial af­fairs is a sore point, both in South Africa and abroad.

In a March press re­lease, Cosatu took ex­cep­tion to the no­tion that their mem­bers could not man­age their fi­nan­cial af­fairs, stat­ing: “This is not only an in­sult to work­ers but smacks of racism. Prov­i­dent funds were es­tab­lished by work­ers pre­cisely to cater for their re­tire­ment.”

This point of view is some­what aligned to that of the worked hard and saved hard all their lives, and done the right thing, should be trusted with their own fi­nances.”

In re­sponse, the UK Na­tional As­so­ci­a­tion of Pen­sion Funds said: “Peo­ple of­ten un­der­es­ti­mate how long they will live and over­es­ti­mate how long their pot will last. There is a recog­nised prob­lem with the lack of fi­nan­cial lit­er­acy in the UK.”

Is the sit­u­a­tion in South Africa any bet­ter? Re­search by San­lam amongst pen­sion­ers – as re­leased in the 2015 San­lam Bench­mark Sur­vey – showed that the most pop­u­lar use of mem­bers’ re­tire­ment lump sum (ei­ther the third from their pen­sion fund or the en­tire amount from their prov­i­dent fund) is as fol­lows (mul­ti­ple re­sponses were al­lowed):

Just un­der half (46.8%) of re­spon­dents in­di­cated that they had al­ready de­pleted their lump sum. Of these, 63% in­di­cated that their lump sum was de­pleted within two years of re­tir­ing. To put these fig­ures in per­spec­tive: roughly 30% of the sur­veyed re­tirees spent their lump sum within two years. Re­tirees from pen­sion funds would then have to sur­vive for the rest of their lives on an amount in the re­gion of twice this lump sum; prov­i­dent fund re­tirees will prob­a­bly have even less money re­main­ing.

This makes the way in which they spent their lump sum par­tic­u­larly im­por­tant. Did their spend­ing help them secure their fi­nan­cial fu­ture? Pos­si­bly not, or so the re­search seems to in­di­cate.

More than two in five re­tirees be­lieved that they had not saved enough cap­i­tal to last the rest of their lives. This is a sober­ing statis­tic, es­pe­cially poignant given that only 7.1% of re­tirees chose to use some of their per­mis­si­ble lump sum to pur­chase an an­nu­ity.

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