A fresh ap­proach to em­ployee ben­e­fits

Per­haps long-term sav­ing should be about more than just re­tire­ment, sug­gests Alexan­der Forbes. re­ports

Weekend Argus (Saturday Edition) - - LIFE -

Can we use em­ployee ben­e­fits to save for more than just re­tire­ment?

Only 4.7 per­cent of re­tire­ment fund mem­bers who re­tired in 2015 had enough re­tire­ment sav­ings to pro­vide them with an in­come or pen­sion of 75 per­cent or more of their fi­nal salary, Alexan­der Forbes, South Africa’s largest re­tire­ment fund ad­min­is­tra­tor says. This and other dis­mal sta­tis­tics about our poor re­tire­ment sav­ings rate and un­will­ing­ness to pre­serve our re­tire­ment sav­ings got Alexan­der Forbes think­ing that it might not be a good idea to con­vince us to fo­cus solely on sav­ing for re­tire­ment.

Re­leas­ing the Em­ployee Ben­e­fits Barom­e­ter, its an­nual sur­vey of re­tire­ment funds in pre­sen­ta­tions to trus­tees and em­ploy­ers around the coun­try this week, se­nior Alexan­der Forbes ex­ec­u­tives asked them to con­sider whether South Africans would be more mo­ti­vated to save for the long term if the ben­e­fits of­fered by em­ploy­ers could be ex­tended be­yond just sav­ing for re­tire­ment.

The truth is that em­ploy­ers and the re­tire­ment in­dus­try are not suc­ceed­ing in per­suad­ing us to save for re­tire­ment, Anne Cabot-Al­let­zhauser, the head of Alexan­der Forbes’s re­search in­sti­tute, says.

If our em­ploy­ers al­lowed us to choose how much of our salaries should be pen­sion­able or how much to con­trib­ute to a re­tire­ment fund, we would choose the low­est amount, be­cause we need the money to sur­vive from one day to the next, she says.

Cabot-Al­let­zhauser says many re­tire­ment fund mem­bers do not see re­tire­ment as their pri­or­ity be­cause they do not ex­pect to live be­yond 60. Ac­cord­ing to Stat­sSA, in 2015 the av­er­age life ex­pectancy in South Africa was 60.6 years for men and 64.3 years for women.

In ad­di­tion, trust in the fi­nan­cial ser­vices sec­tor and the govern­ment is low, she says.

Year af­ter year, the re­tire­ment in­dus­try urges peo­ple to save, but the mes­sage is ig­nored, Cabot-Al­let­zhauser says. “It’s time to come up with a bet­ter idea.”

The govern­ment is look­ing for a bet­ter so­cial pro­tec­tion plan and em­ploy­ers want to pro­vide good em­ployee ben­e­fits, but when it comes to par­tic­i­pat­ing in the pro­vi­sion of th­ese ben­e­fits, em­ploy­ers are bow­ing out and out­sourc­ing the role, and em­ploy­ees are clock­ing out, she says.

Em­ploy­ers are pro­vid­ing ben­e­fits with­out as­sum­ing li­a­bil­ity for pro­vid­ing pen­sions: they are mov­ing em­ploy­ees out of funds that pro­vide a pre­de­ter­mined in­come in re­tire­ment to ones that pro­vide a lump sum at re­tire­ment that mem­bers must use to buy a pen­sion.

Many are also choosing not be in­volved in run­ning stand-alone re­tire­ment funds and are shift­ing em­ploy­ees to um­brella funds, typ­i­cally spon­sored by fi­nan­cial ser­vices com­pa­nies and served by in­de­pen­dent or spon­sored trus­tees.

Cabot-Al­let­zhauser says your re­tire­ment fund is prob­a­bly your most im­por­tant sav­ings ve­hi­cle, but many mem­bers do not un­der­stand its power.

Last year, the re­search fo­cused on how re­tire­ment funds could en­sure that we re­main com­mit­ted to sav­ing by pro­vid­ing sup­port at the work­place to help us achieve fi­nan­cial well-be­ing.

But Cabot-Al­let­zhauser says it is not pos­si­ble to train the en­tire fi­nan­cial ser­vices in­dus­try to fo­cus on fi­nan­cial well-be­ing. So Alexan­der Forbes looked around the world for in­spi­ra­tion and found it in the Sin­ga­porean re­tire­ment-fund­ing model.

When Sin­ga­pore be­came in­de­pen­dent 40 years ago, it set a goal of mak­ing peo­ple more fis­cally re­spon­si­ble with­out in­tro­duc­ing a wel­fare state, she says. It found it was pos­si­ble to teach peo­ple fis­cal re­spon­si­bil­ity by giv­ing them ac­cess to their re­tire­ment sav­ings to buy as­sets and ser­vices that would ul­ti­mately de­velop the coun­try and give them ac­cess to greater wealth.

Sin­ga­pore made it com­pul­sory for em­ploy­ees and em­ploy­ers each to con­trib­ute 20 per­cent of the em­ploy­ees’ in­come to long-term sav­ings, and al­lowed them to ac­cess th­ese funds to pay for hous­ing, ed­u­ca­tion and health care.

Cabot-Al­let­zhauser says the re­sult is that 40 years later Sin­ga­pore has one of the high­est fi­nan­cial lit­er­acy rates in the world, the third-high­est rate of sav­ing and one of the low­est lev­els of debt.

Alexan­der Forbes en­gaged Ayabonga Cawe, an economist and the co-founder and chair­man of the non-profit or­gan­i­sa­tion Re­think Africa, to con­duct re­search among mem­bers of the funds it ad­min­is­ters to find out what goals would per­suade them to com­mit to sav­ing for the long term. The re­search found that mem­bers ranked cover for fu­ner­als as their top pri­or­ity and re­ceiv­ing a lump sum at re­tire­ment sec­ond (see graph).

Re­ceiv­ing an in­come in re­tire­ment was their low­est pri­or­ity, fea­tur­ing af­ter hav­ing an emer­gency fund, buy­ing or build­ing a house, pay­ing for ed­u­ca­tion and pay­ing for health care, he says.

Michael Prinsloo, the ex­ec­u­tive head of in­sti­tu­tional re­search and prod­uct de­vel­op­ment at Alexan­der Forbes, says the ad­min­is­tra­tor did some cal­cu­la­tions to as­cer­tain whether it would be pos­si­ble to fund other ex­pen­di­ture from re­tire­ment sav­ings with­out hik­ing con­tri­bu­tions or sig­nif­i­cantly re­duc­ing what mem­bers could save by the time they reached re­tire­ment.

He said the cal­cu­la­tions started with a mem­ber whose to­tal (em­ployee and em­ployer) con­tri­bu­tion to a re­tire­ment fund is 12.5 per­cent of his or her an­nual nett in­come of R72 000. The mem­ber con­trib­utes from age 23 to age 63, with group life and dis­abil­ity ben­e­fits taken care of separately by the em­ployer. As­sum­ing this per­son re­ceived in­fla­tion-re­lated salary in­creases through­out the 40-year pe­riod and did not make any with­drawals from his or her re­tire­ment sav­ings, he or she would re­tire with sav­ings able to gen­er­ate an in­come in re­tire­ment of 50 per­cent of his or her salary.

Prinsloo says if this per­son was ex­pected to con­trib­ute to an emer­gency fund, to pay off a R250 000 house by age 43, and to fund the school­ing at R29 000 a year and the ter­tiary ed­u­ca­tion at R50 000 a year of two children, he or she would have to save 60 to 80 per­cent of his or her in­come, de­pend­ing on the as­sump­tions used. It was ob­vi­ously not fea­si­ble to ex­pect South Africans to con­trib­ute at such a high level.

Alexan­der Forbes cal­cu­lated, how­ever, that if a life-stage ap­proach were used – more of the con­tri­bu­tion meets im­me­di­ate needs when you are younger and more is used to fund re­tire­ment when you are older – a mem­ber who contributed 46 per­cent of his or her in­come would be able to save enough to meet all th­ese goals and re­tire with an in­come in re­tire­ment of 51 per­cent of his or her fi­nal salary. Prinsloo says if you add up what you spend on ed­u­ca­tion, hous­ing, emer­gency and re­tire­ment sav­ings, you would prob­a­bly reach a per­cent­age close to 46 per­cent, but this could still prove un­af­ford­able for a mem­ber on in­come such as R72 000 year.

The con­tri­bu­tion level could drop to 20 per­cent if the ed­u­ca­tion of em­ploy­ees’ children was sub­sidised by the em­ployer, he says. And sav­ing through an em­ployee ben­e­fits scheme could pro­vide cost-ef­fi­cien­cies if the scheme were manda­tory for all em­ploy­ees, he says.

Wouldn’t it be bet­ter if 50 per­cent of South Africans saved enough to pro­vide an in­come in re­tire­ment equal to 50 per­cent of their fi­nal salary than the cur­rent sit­u­a­tion where only five per­cent of mem­bers save enough to pro­vide a re­tire­ment in­come equal to 75 per­cent of their fi­nal salary, Prinsloo asks.

We need a new em­ployee ben­e­fits model that meets some key so­cial pro­tec­tion needs, he said.

Prinsloo says the ob­jec­tive of a re­tire­ment-fund­ing sys­tem is to en­able peo­ple to re­tire with fi­nan­cial se­cu­rity. The Ben­e­fits Barom­e­ter ar­gues the case for meet­ing our needs for hous­ing, the ed­u­ca­tion of our children and sav­ings for emer­gen­cies as a way of con­tribut­ing to our fi­nan­cial well-be­ing in re­tire­ment.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.