Retirement: it’s not ‘when’ but ‘do I have enough?’
Sixty-five is a “random” retirement age. The date on which you retire should not be determined by your age, but by your financial readiness to retire. This is a key message that came out of the Institute of Retirement Funds Africa (IRFA) conference this w
The longer you work, the better it is for your retirement savings. At present, your employer determines your retirement age. But you need to take control of when you retire, Michelle du Toit, the head of Old Mutual Actuaries and Consultants, says.
Du Toit was addressing trustees on the topic of retirement age at the IRFA conference in Cape Town this week. She was joined by Ashleigh Davies, a consultant for Old Mutual, and Andrew Davison, the head of investment consulting at Old Mutual Corporate.
Labour legislation does not stipulate retirement age, Davies says. Retirement age is typically agreed to by an employer and employee in the employment contract, which is binding on both parties. If your retirement age isn’t stipulated in your employment contract, it may be determined by company policy or the rules of your pension or provident fund, Davies says.
“It’s trite to say that, for the majority of working people, their retirement capital is going to disappoint. A recent survey showed that 90 percent of South Africans are going to fall well short of their 75-percent replacement ratio,” Davies says.
The replacement ratio is your retirement income expressed as a percentage of your last salary cheque, and you should aim for a ratio of no less than 75 percent. For example, if you draw a salary of R25 000 in your last month of working, a replacement ratio of 75 percent will give you R18 750 a month.
Davies says that while we’re retiring with insufficient savings, we’re also living longer than previous generations. Since the 1990s, the average mortality rate has increased inter nationally by six years, from 64 to 70, he says.
We’re also in a low-inflation environment, a precondition for lower investment returns, which, in turn, affect the accumulation of capital. “This means the pension you can purchase is under pressure,” he says.
Another factor influencing how much people save for retirement is children living at home for longer as they qualify themselves better for the workplace. The effect of children studying for longer is that it crimps their working lives, and this manifests at the time of retirement, Davies says. This is one of the issues that trustees and consultants need to take into account in the design of benefit structures in retirement funds, Davies says.
Given these different pressures, there is a strong case to be made for raising the retirement age, he says.
Davison says that most governments have been raising the retirement age, because they are having to provide substantial retirement benefits to their populations. This is a significant and growing liability because of the ratio of older people relative to those who are working.
However, in 2008, South Africa reduced the retirement age for men qualifying for a state pension to the age of 60. Before the law changed, women qualified at age 60, but men had to be 65. The change to the law was to gather more people into the social security net. Davison says that “individuals have taken the wrong message” and think that since the government has lowered the retirement age, clearly it’s okay to retire at age 60.
“But we shouldn’t see retirement as a date,” he says. “This mindset has to change.”
He says George Foreman, the now-retired professional boxer, when asked when he was going to retire, said that it’s not a question of what age he would like to retire at, but at what income.
“That’s the way we should all be thinking: retirement is not about an age; it’s about being equipped financially to retire.”
Retirement age was introduced in a world dominated by manual labour, and people had to stop working because of the physical demands of work. But today’s world, which is dominated by “knowledge workers”, is different. These workers can work well into their 60s, Davison says.
He says that if your population of people who are not working outnumbers those who are working, it puts a strain on government and economic growth. “We must be careful of thinking we can sacrifice older workers and replace them with younger workers”, he says. “That’s flawed thinking; we want as many people working as possible, irrespective of age.”
Du Toit says it is critically important that people work for as long as possible. “We spend a lot of time speaking to people about how to save more, how to enhance their investment returns, and how to preserve
their retirement savings, but very little time educating members on the impact of retirement age.”
She says it’s not uncommon for people to retire years before the retirement age as defined by their pension or provident fund. She says this is often because people don’t understand the adverse financial impact of early retirement.
“At birth, your average life expectancy is 71. In South Africa, it’s 59. But as soon as you reach age 65, the average life expectancy for a man is 84 and for a woman is 86.”
That means you will live 20 years, on average, in retirement. If you retire at 55, you need to be able to support yourself financially for 30 years or more – yet people are opting to retire early.
Du Toit says that when people realise that they’re going to retire with a low replacement ratio, they consider investing more aggressively or contributing more. “But one of the easiest and most affordable things to do is to delay retirement, because of the significant financial benefits.” (See “Replacement ratios at retirement”, left.)
One of the most cost-effective solutions to retiring with insufficient capital is to prolong your working life. Trustees need to spread the message and discourage members from retiring at 55.
“It comes down to the education of members. It’s critical we make members aware of this option,” Du Toit says. Serious failures of governance by retirement fund trustees have resulted in an increase in complaints to the Pension Funds Adjudicator, according to the adjudicator and the Deputy Registrar of Pension Funds.
The adjudicator, Muvhango Lukhaimane, told the Institute of Retirement Funds Africa (IRFA) conference this week that last year her office had an almost 30-percent increase in complaints and in the first quarter of this year there was a further 15-percent increase.
Lukhaimane says the role of a trustee is not overly complicated if trustees pay attention to the things that are important. She says it is perplexing, however, that trustees have taken a “back seat” in favour of administrators and consultants.
When members join a retirement fund, they pay contributions and entrust the fund with the realisation of a promise, the adjudicator says. The promise is of:
A decent return on their savings, A retirement benefit, and A death and disability benefit. While they await the fulfilment of that promise, members ask trustees:
For information related to their benefits;
For the fund’s rules and any significant changes to them; To submit financials on time; To put in place proper governance structures and systems for early warning of failures; and
To pay benefits on time. Lukhaimane called on trustees to “reclaim their space” – their responsibility and accountability – and to pay attention to these important issues.
She said trustees should also stop assisting administrators to keep members in funds by engaging in questionable activities around transfers from one fund to another, as allowed under section 14 of the Pension Funds Act.
“Ask yourselves as member representatives on boards: why did you fight for the right to be at the table in the first place? You wanted to make a difference. If you cannot convince your members that you are doing the best for them, let the members go [to another fund]. In the end, being a fund member is largely about the promise of having something saved, and if you cannot deliver it, let them go to the next best person who can do that,” Lukhaimane said.
Rosemary Hunter, the Deputy Registrar of Pension Funds at the Financial Services Board (FSB), told the IRFA conference that there were serious shortfalls of governance, particularly in the appointment of service providers.
She says the FSB is currently dealing with a fund that made an investment decision that has “fallen apart”. The FSB has sent questions to the principal officer and each member of the board, wanting to know what each trustee’s role was when the decision was taken – in other words, what each board member did personally.
She says the FSB does not want to remove the entire board, because “not all of them are rotten”, and some may even have disagreed with the decision.
The trustees have also been advised not to use the fund’s lawyers to answer the FSB’s questions, and that instruction is now subject to a legal challenge, Hunter says.
Boards of trustees often have dominant voices, but funds don’t need trustees who are “going along for the ride”, Hunter said.
Steven Nathan, the chief executive of 10X, a company that provides retirement investments that use low-cost index-tracking funds, says the National Treasury is busy with retirement reform because it has identified a problem with retirement funding: some people are not getting good value.
He says there is uncertainty about what the regulator will do and by when it will introduce legislation, but retirement fund trustees know there is a problem and should start doing something now.
Nathan also says that trustees who are not as informed as they should be should not rely on the advice of service providers, because these providers may be conflicted.
The investment industry has launched too many complex products, he says. What trustees simply should be trying to achieve for members is more money at retirement, and this should be their focus, not forgetting that they are dealing with long-term investments.
The principles of long-term investing are not that difficult; reading just three books will give trustees all they need to know, Nathan says. These are: The Little Book of Common Sense Investing, by John Bogle; Rational Expectations: Asset Allocation for Investing Adults, by William Bernstein; and Elements of Investing, by Charles Ellis and Burton Malkiel.
Nathan suggests that trustees tackle one thing at a time: “If you try to do too much, you often achieve very little.” For example, trustees could set a benchmark for the fund’s investments or demand improved disclosure of fees.
Finance Minister Nhlanhla Nene has extended Lukhaimane’s term of office for three years, to the end of June 2018. Lukhaimane took up the post of Pension Funds Adjudicator on July 1, 2013.