The cost of dipping into savings
Most retirement fund members face living on 20% of last salary
● More than half of SA’s retirement fund members are retiring on a pension that is 20% or less of their last salary, the latest research from Alexander Forbes reveals.
The data in Alexander Forbes’s latest Member Watch is collected from the more than 2,000 retirement funds the company administers and more than 1-million members of those funds.
The findings tie in with those of another major survey of funds and members conducted this year by Sanlam. In its Benchmark survey, trustees canvassed were of the view that less than 16% of retirement fund members are on track to achieving their retirement goals and 85% of members will not be in a financial position to maintain their preretirement standard of living.
Michael Prinsloo, the managing executive of research and product development at Alexander Forbes, says while the industry norm is for South African retirement funds to target a pension in retirement of between 60% and 75% of your final salary, the analysis has found that only about 5% of retirees get to enjoy a pension income of more than 80% of their last working-year salary.
The actual average income that retirees in Alexander Forbes’ survey receive is 28% of their final salary, but this average is skewed as it includes members who retire on a high percentage of their final salary, Prinsloo says. The true picture is that more than half of the members are retiring from their occupational retirement funds on pensions of less than 20% of their last working incomes, he says.
The consequences of these low pension rates are that these retirees face a restricted lifestyle and it makes them reliant on the state or their family for financial support.
A key reason for the low level of pensions is that retirement fund members fail to preserve their savings when they change one job for another.
Over the past six years, about 13 out of every 100 members in the survey left their funds but only one of the 13 preserved what they had built up in retirement savings.
The failure by so many South Africans to preserve their retirement savings has led to the government promulgating new regulations that take effect on March 1 next year.
In terms of the regulations, unless you specifically ask to be paid your retirement savings when you move between jobs, your savings will automatically remain in the fund until you instruct the fund to pay you or to transfer your savings to another fund, or you retire from the fund.
Prinsloo says that among the employers whose funds Alexander Forbes administers, the turnover of staff has increased by a fairly marked 2% a year. This means there are more points in members’ lives to make the decision to preserve their pension savings or not.
One of the most common reasons given by members for not preserving their benefits is that they are financially stressed or that their savings in the fund or fund credit are too low to warrant the trouble of preserving.
The more money members have, the more likely they are to preserve. The survey shows members with R1m and more are more likely to preserve, says Prinsloo.
Tax incentives for retirement savings, easy ways to preserve money within the fund, and access to financial advice also improve the rate of preservation. The retirement industry is hopeful that default preservation when a member leaves a fund and the counselling on retirement benefits that will be mandatory from March next year will increase the level of retirement savings that members keep until retirement.
In Sanlam’s Benchmark survey, Janus Engelbrecht, business and product analyst at Sanlam Umbrella Solutions, describes not preserving when you change jobs as being similar to stopping a rolling snowball halfway down the hill and starting with a small snowball all over again. If you do this multiple times along your journey to retirement, your snowballs will be much smaller than the big one you could have had if you had kept on rolling it down the hill, he says.
He cites the example of a 25-year-old member with a starting salary of R5,000 a month, who starts contributing 8% of his salary to his retirement fund and whose salary increases annually by 6.5% throughout his career. Assuming he earns 9% a year interest on his retirement savings, he will have about R2.5m when he retires at 60.
However, if he changes jobs at 35 and spends his retirement savings payout, he will have about R1m less at retirement, Engelbrecht says.
The Alexander Forbes survey shows members are actually retiring on average at age 61, about two years earlier than the average normal retirement age set by funds, and this is costing members between 8% and 15% of what they should achieve at retirement, Prinsloo says.
It really is important that you understand the cost of retiring early because it has a huge impact on your pension, he says.
Interventions by the industry — such as retirement benefits counselling, default portfolios for preserving savings, allowing members to make additional contributions to the fund and allowing members to change the level of risk benefits they have so that a greater proportion of savings can be allocated to the retirement savings pot — can play a role in boosting retirement benefits, he says.
But it is just as important for members to participate and take responsibility for their own financial wellbeing, Prinsloo says.
Sabir Bacus, an employee-benefits consultant at advisory firm GTC, says the default options for investment, preservation and the annuity or monthly pension you buy at retirement may cause increased complacency among members if they rely solely on trustees to make choices.
Trustees’ choices may relieve some of the pressure members feel when faced with how to preserve their savings, but trustees cannot guarantee an optimal outcome for every member according to their individual needs, he says.
Your savings in an employer-sponsored retirement fund are only one element of a holistic, long-term financial plan, which ought to be complemented by other investments aimed at remedying shortfalls and meeting your goals, he says.