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?
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.