Consumer-friendly products would be a ‘great thing’
Old Mutual this week published its bi-annual Savings Monitor, which surveys the savings behaviour and attitudes of 1 000 households in the main metropolitan areas. The main findings are:
The current working generation is the “sandwich generation”. In other words, it is increasingly likely that this generation will have to support both its children and its parents. This undermines its ability to save for retirement, which means that it in turn will become dependent on the next generation.
Attitudes to saving are gradually changing. The percentage of participants surveyed who said they could not get by without buying on credit fell since the November 2009 survey, from 48 percent to 43 percent, while the percentage of people surveyed who regard saving as a non-priority dropped from 33 percent to 24 percent.
Awareness of the need to save does not necessarily lead to actual saving, with many people simply procrastinating – to their detriment.
Overall savings as a percentage of income has increased steadily over the past 18 months, from 15 percent to 20 percent of after-tax income. (The monitor includes all types of savings, including using income to pay off debt faster.) This, however, has occurred in an environment where inflation and interest rates are falling and the stock market is recovering.
People in the lowest income group (those who earn up to R6 000 a month) are, not surprisingly, the worst savers, because most of their money goes towards buying essentials of daily life.
People who earn more than R20 000 a month save the most. They are also most likely to invest their savings in formal products such as retirement annuities, collective investments and life assurance endowments.
Most people have taken advantage of lower interest rates to pay down their debt.
Many of the above findings were fairly predictable, and, although there has been an improvement over the past 18 months, the survey still paints a very worrying picture.
What is also worrying is the shortcomings of the survey. It does not analyse how and why people save. The survey also shows that companies in the traditional formal savings sector are not adapting their products to meet the requirements of most South Africans. They continue to flog inappropriate products.
In its conclusions on the survey, Old Mutual says that “products that have a built-in element of discipline lead to more successful savings”.
Research by Finmark Trust, a non-gover nmental organisation, shows that lower-income earners have shorter-term savings horizons. They save to pay for things such as school fees. Upper-income earners invest for the long term, for things such as retirement.
Yet companies such as Old Mutual continue to push their highcost, long-ter m contractual products, with their attendant confiscatory penalties, on to low-and middle-income ear ners, without telling them that these products are creating a tax liability that they would otherwise not have had.
Earlier this year, Old Mutual went as far as to make the false claim that a low-income investment product was tax-free. When the error of its ways was pointed out, Old Mutual simply changed the wording of the advertisement to state that the product was tax-free in your hands.
Old Mutual failed to point out that if you bought its product and were on a tax bracket of below about 35 percent, you would incur a tax liability, because life assurance companies pay income tax and capital gains tax on the investment portfolios. This is simply dishonest exploitation. Old Mutual should rather live up to its new catchphrase, “Do great things”.
KIND OF PRODUCTS WE NEED
A great thing would be to create savings products that foster consumer confidence and inspire them to save. The life industry as a whole has done a very good job of undermining public confidence in its savings products, and this has probably spilled over into its inability to sell much-needed risk life assurance against death and disability.
Old Mutual and the life industry, along with the banking industry, should take a close look at the savings products of Capitec Bank.
Now here is a company that is truly doing great things. Its savings products have been designed to meet the savings requirements of lowerto middle-income earners.
I recently interviewed Capitec chief executive Riaan Stassen for the first-quarter 2011 edition of Personal Finance magazine.
He says, correctly, that the difference between lower-income and wealthy people is that wealthy people can afford to invest to make more money, whereas lower-income people build wealth and achieve their financial goals by saving a portion of what they earn. This means that products such as life assurance endowment policies with minimum five-year investment ter ms and severe penalties if premiums are skipped are unsuitable for lowerincome people.
Capitec, with its products, not only tries to encourage saving but it seeks to avoid the downsides of life assurance products.
Capitec is setting a trend by showing that things can be done a lot better. It has also given the lie to the claim by the big banks that they have to levy high charges because they have to service an unprofitable lower-income market. Well, that is exactly where Capitec focused its initial growth. It has brought affordable banking to the market. It is now also attracting many middleto higher-income earners. There are no complex charges. Its savings and banking products are well integrated and, most importantly, it has the lowest costs in town.
So, Old Mutual, when you bring out the next Savings Monitor six months hence, simultaneously “do great things” by unveiling a new range of products that are designed to help people save, that will not mislead people, that will engender confidence and that are not designed around the remuneration of product floggers.