Con­sumer-friendly prod­ucts would be a ‘great thing’

Weekend Argus (Saturday Edition) - - GOODWINES -

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.

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