A retirement system in crisis
The sad state of retirement savings in SA is only getting worse. No amount of tax incentive or pleading from the Treasury seems able to entice people to do better. Consumer education initiatives from the financial services industry seem also to have little success with changing behaviour, according to Alexander Forbes’s member watch survey.
According to the study, released in November, only 5.17% of people who retired from funds administered by Alexander Forbes are able to maintain their standard of living. The data is based on more than 2,000 retirement funds, representing more than 1-million members, administered by Alexander Forbes.
The survey also showed that the rate of preservation when people change jobs had decreased to just 8.7% from 11.5% six years ago. That means more than nine in 10 people who changed jobs, retired or left their retirement funds for another reason took their savings in cash, rather than transfer it to a new retirement savings product or, for those in retirement, buy an annuity.
There are many reasons for this. For one, many people are highly indebted, a fact that financial institutions have acknowledged. Taking on debt is ultimately the individual’s decision but we have to ask ourselves if the market isn’t encouraging this behaviour. A lot of money is spent by institutions to advertise and directly market personal loans, credit cards and payment holidays on new cars. But how often are home loans and investment products directly marketed to consumers?
Many people have been blacklisted for debt that they shouldn’t have taken on in the first place and now cannot access the “good” debt they need to build wealth loans taken to build an asset that will increase in value over time or generate income. Figures quoted by the Government Employees Housing Scheme in 2016, for example, showed that 1.3-million public servants earned too little to qualify for a bond and, as a result, 70% of them did not own their homes. A few financial services organisations, such as Old Mutual, have invested in affordable housing through impact funds in social infrastructure, but more should be done to improve housing access for lower-income earners.
There is also mistrust between the financial services sector and the general public. In 2017 researchers at Boston Consulting Group found SA consumers, especially low-income earners, have a deep mistrust of banks and insurance companies because of complex product design, nontransparent fee structures and unscrupulous behaviour among agents, among many concerns.
Before 10X Investments and Sygnia started highlighting how the traditional players were ripping off consumers by taking up to 40% of their retirement investment returns in fees, everyone else in the commercial retirement fund space was comfortably charging about 2% of the investment value, the Treasury’s discussion paper on charges in SA’s retirement funds showed in 2013. Memories of destruction of value in their parents’ retirement savings are still fresh on the minds of young professionals who should be diligently saving for retirement. New-generation retirement annuities are trying to change this, but they still come with bells and whistles that consumers don’t understand.
Low investment returns in recent years leave many people wondering if they could be more successful at building wealth by investing in hard assets such as property or starting a business. Alexander Forbes’s replacement ratio index shows that a 65year-old who was on track to receive 75% of their salary at retirement in December 2001 only received 52.8% when they retired in March 2018. Someone 10 years younger received only 44% because of a sharp decline in bond yields since 2002.
The Treasury’s steps to lower fees and improve retirement outcomes should be hailed. But these numbers show much more must be done by regulators, the financial services industry and individuals themselves to ensure more South Africans can retire comfortably.
CONSUMER EDUCATION INITIATIVES IN THE INDUSTRY SEEM TO HAVE LITTLE SUCCESS