Recession takes its toll on pool of retirement savings
If you have been retrenched due to the global economic downturn, news that the markets are recovering probably offers little comfort. A long-term consequence of the recession is that both hard-hit employers and the newly unemployed are putting pressure on
The retirement savings pool is facing rapid evaporation under the hot glare of the international recession, which saw more than one million South Africans losing their jobs last year.
Most of those who have lost their jobs have taken their retirement savings and are using them for financial survival, particularly as they face a slim chance of finding new employment in the short term. Old Mutual, for example, recorded 17 272 withdrawals from its umbrella retirement funds last year. In only 83 of these cases did members preserve their savings by transferring them to another retirement savings vehicle.
While retirement savings lost value as a result of the international market meltdown, with the South African equity market at one stage losing almost 45 percent of its value, the long-term impact will come from job losses – particularly where companies have closed down – rather than from investment values.
Markets are undergoing a stillfragile recovery, with the JSE All Share index having broken through the 28 000 mark, recovering from a low of about 17 000.
However, jobs are still being lost as a result of companies closing down and continuing widespread retrenchments. And, to keep their businesses afloat, struggling employers are seeking other ways to save costs, including stopping or reducing contributions to retirement benefits (See “Ways embattled employers can target your contributions and benefits” below) and group risk assurance.
This can have a double whammy effect on employees, as they face an increased prospect of not having a financially secure retirement; and if you die or are disabled before retirement, you or your dependants could face immediate penury if alternative risk assurance arrangements are not made.
John Anderson, the head of national consulting strategy at retirement fund administrator Alexander Forbes, says other ways employers could seek to cut costs that will affect retirement savings and risk benefits include:
Reducing staff working hours (short time), thus paying proportionately less and automatically reducing your retirement fund benefits;
Reducing benefits provided by funds or policies; and
Freezing benefits. Anderson warns that before employers take any of these measures they should weigh up the long-term implications. Research shows that “welldesigned benefit programmes can assist in attracting the best skills and improve productivity, which improve competitiveness. Shortterm solutions will have long-term consequences.”
He says a growing problem is that employers are making late payments to retirement funds. Employers are supposed to pay their share of contributions and the contributions deducted from the pay of employees within seven days of the end of each month.
If payments are not made within one or two months, one of the immediate effects is that members could lose group risk life and disability cover.
There is no precise data yet on how many retirement funds were closed last year, and a rough survey conducted by Personal Finance among some of the major umbrella retirement fund administrators was inconclusive.
Withdrawals due to retrenchments and withdrawals with retirement savings not being preserved, rather than fund closures, are currently the main consequences of the recession.
Alexander Forbes, Liberty, Metropolitan, Momentum and Sanlam have recorded upward trends (mainly slight) in the liquidation of funds, but Old Mutual has not detected a discernable trend.
Sanlam says it has had numerous inquiries from employers about closing funds, cutting contributions or limiting benefits.
But spokesmen for the companies warn that the position could still get worse as the country fights its way out of the recession.
There were, however, two bright lights over the past year. These were:
An increasing number of employers offering retirement fund arrangements to employees for the first time; and
A decline in the number of people resigning from their jobs to get their hands on their retirement savings. The reason, Anderson says, is that the demand for labour has fallen, creating the fear of not finding a new job.