Pre­serv­ing funds for re­tire­ment is eas­ier but fewer peo­ple do it

• The pro­por­tion of mem­bers who pre­serve has fallen to 8.7% in 2018, says Alexan­der Forbes

Business Day - - The Bottom Line - STEPHEN CRANSTON /Fi­nan­cial Mail ● Cranston is Fi­nan­cial Mail as­so­ciate edi­tor.

Alexan­der Forbes has done the widest sur­vey of the health of re­tire­ment funds and their mem­bers. Its an­nual Mem­ber Watch for the first time in­cluded more than 1-mil­lion clients be­long­ing to the group’s 2,030 em­ployer clients.

As Forbes head of client cov­er­age John An­der­son puts it, for many a pen­sion is their only form of long-term sav­ings. But to live com­fort­ably in old age there needs to be a suf­fi­cient and con­sis­tent level of con­tri­bu­tions and an ap­pro­pri­ate level of in­vest­ment re­turn after fees.

To make these con­tri­bu­tions af­ford­able, there should be steady progress in the mem­ber’s salary. Pen­sion funds also need to make de­duc­tions for group life and dis­abil­ity cover.

But it is equally im­por­tant for mem­bers to pre­serve their fund cred­its, and this has re­cently been made eas­ier as ac­cu­mu­lated cap­i­tal can now stay in the fund after res­ig­na­tion, and the mem­bers can change their sta­tus to paid-up. Up to 27.5% of to­tal in­come is tax de­ductible if it goes into a re­tire­ment fund and/or re­tire­ment an­nu­ity fund.

An­der­son says mem­bers need to con­trib­ute at least 17% to their funds for 40 years to achieve a com­fort­able re­tire­ment. This is de­fined, at least by most con­sul­tants, as a 75% re­place­ment ra­tio — your pen­sion will be three-quar­ters of the amount of your fi­nal salary.

If the con­tri­bu­tion is 11% from the age of 20, even if paid re­li­giously through an en­tire ca­reer, the re­place­ment ra­tio will be barely 40% — in spite of what you have read about com­pound in­ter­est. Even at 13%, the re­place­ment ra­tio will be just 50% of fi­nal salary.

To achieve the magic 75% num­ber, An­der­son says mem­bers need a fund credit of at least 12 times pen­sion­able salary. But in the Forbes data­base the av­er­age con­tri­bu­tion was 4.96% from mem­bers and 9.15% from the em­ployer. After ex­penses and risk cover costs of 3.22%, the av­er­age con­tri­bu­tion is just 12.17%. The gross con­tri­bu­tions for Alexan­der Forbes’s pub­lic sec­tor clients, at 23%, is much higher than for any of the pri­vate sec­tor in­dus­tries, which range from 15.9% in fish­ing, forestry and agri­cul­ture down to 11.5% in pro­fes­sional and busi­ness ser­vices — pre­sum­ably the lat­ter are be­lieved to be qual­i­fied to fend for them­selves.

Fish­er­men, how­ever, get one of the low­est death ben­e­fits at just over one times salary; re­tail, man­u­fac­tur­ing and con­struc­tion all get 2.5 times salary.

The av­er­age ac­tual re­place­ment ra­tio was 28.8%. An­der­son says only 6% of mem­bers can ex­pect to reach that magic 75% re­place­ment ra­tio level. There is one sim­ple, but not nec­es­sar­ily de­sir­able, way to in­crease the re­place­ment ra­tio: de­lay­ing re­tire­ment. Stay­ing on to 65 in­stead of leav­ing at 55 can dou­ble the re­place­ment ra­tio, both through fur­ther con­tri­bu­tions and be­cause a pen­sion isn’t yet be­ing paid out.

Mem­bers can de­stroy value by mak­ing changes too fre­quently to their in­vest­ment port­fo­lios, but in fact less than 1% of mem­bers made in­vest­ment switches over the year to March 2018. Only 85 (and I mean 85 not 85,000) of the 1-mil­lion mem­bers made six or more switches to their port­fo­lio, which would qual­ify as some­what reck­less mar­ket tim­ing.

If any­thing, mem­bers are too con­ser­va­tive. Out of the 14% ex­er­cis­ing choice un­der 55, al­most 40% opt for a port­fo­lio with less than 50% in eq­ui­ties, and 10% port­fo­lios with no eq­ui­ties — even though with the lux­ury of time in­vest­ing in risky as­sets such as shares makes sense. Baby boomers are still em­brac­ing risk, which makes sense given that with their in­creased lifes­pan many could spend 30 years in re­tire­ment. About 30% of over-60s who are still work­ing are in­vested in medium- to high-risk port­fo­lios. It makes sense if they are plan­ning to move into eq­uity-rich liv­ing an­nu­ities on re­tire­ment.

Low preser­va­tion rates re­mains a more im­por­tant is­sue. When I left my first job I am not sure preser­va­tion funds ex­isted, and the per­son­nel depart­ment made no ef­fort to ed­u­cate us about them if they did. We were given a cheque on our way out of the build­ing, which didn’t even in­clude the com­pany con­tri­bu­tions. Now, if we don’t re­quest other­wise our cap­i­tal will be left in the fund, par­tic­u­larly for peo­ple who won’t au­to­mat­i­cally join an­other em­ployer’s fund.

But, un­for­tu­nately, if we are un­der 35 and are told we can have R30,000 to R50,000 cash in hand with bills to pay, rather than sav­ing it for a no­tional date many years in the fu­ture what de­ci­sion are we go­ing to make?

Mem­bers are cer­tainly vot­ing with their feet. The pro­por­tion of mem­bers who pre­serve has fallen from 11.5% in 2012 to 8.7% in 2018. The weaker econ­omy has clearly played a part.

The fig­ure does not look quite so bad ex­pressed in as­sets. A higher pro­por­tion of mem­bers with large cred­its pre­serve, but even here preser­va­tion has fallen from 50.6% to 48.4%.

And preser­va­tion rates in­creased with age: more than 97% of peo­ple un­der the age of 25 cash in, and this falls to 61% for the over 65s.

Com­pul­sory preser­va­tion is a po­lit­i­cal hot potato. Al­most all stake­hold­ers claim their mem­bers “need” the money. The sys­tem of state grants may side­line that ar­gu­ment. The tax­man makes it very at­trac­tive to keep con­tri­bu­tions in a pen­sion fund as all in­vest­ment growth is tax free. Per­haps the tax on with­drawals should be more puni­tive. With­drawals up to R25,000 are tax free and the bal­ance up to R650,000 is taxed at a pref­er­en­tial 18% rate.

It is per­haps not too sur­pris­ing that re­tail, whole­sale and hos­pi­tal­ity are the worst pre­servers at just 4%, since they have a cul­ture of ca­sual work. Cu­ri­ously, en­ergy is by a clear mar­gin the most re­spon­si­ble sec­tor, with a 17.7% preser­va­tion rate, per­haps be­cause they live with the un­cer­tainty of the oil price and need a se­cu­rity blan­ket. It isn’t clear where peo­ple who work for en­ergy com­pa­nies and those who work in re­tail fore­courts fit into this ma­trix. Ex­clud­ing en­ergy, the pub­lic sec­tor is a bet­ter pre­server than the pri­vate sec­tor.

MEM­BERS NEED TO CON­TRIB­UTE AT LEAST 17% TO THEIR FUNDS FOR 40 YEARS TO ACHIEVE A COM­FORT­ABLE RE­TIRE­MENT

CU­RI­OUSLY, EN­ERGY IS BY A CLEAR MAR­GIN THE MOST RE­SPON­SI­BLE SEC­TOR, WITH A 17.7% PRESER­VA­TION RATE

/Rus­sell Roberts

Equa­tion: John An­der­son, the head of client cov­er­age at Alexan­der Forbes, says in­crease sav­ings or re­tire later.

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