Employers dodging pension obligations

PRESERVATION: EARLY WITHDRAWAL DESTROYS COMPOUND VALUE

South African savers have a bad habit of spending their retirement savings whenever a temporary crisis arises and employers need to do more to encourage fund preservation, a new study shows.

Asignificant portion of employees have a poor understanding of the consequences of cashing out their retirement fund benefits when changing jobs – and employers aren’t helping.

This is one of the takeaways from this year’s Sanlam Benchmark Survey. The survey, which will be released later this month, is the result of engagement with standalone employer funds, employers in umbrella funds, active pension fund members and pensioners. It highlights current trends, issues and perceptions in the retirement industry.

Losing time

Early withdrawals is one of the main reasons why many South Africans can’t retire comfortably. A lack of preservation means savings don’t have enough time to accumulate and members lose out on the significant benefit of compound interest.

Viresh Maharaj, marketing actuary at Sanlam Employee Benefits (SEB), said of current members who have withdrawn their pension fund benefits, 40% regret their decisions.

Just over 45% did not have an idea of the consequences that taking their benefit in cash would have on their retirement outcome.

“That’s big. Almost half of members who withdrew, had no idea that this would affect their retirement outcome negatively,” he said.

Of current members, 49.3% did not realise the level of tax they would need to pay on their withdrawal benefit.

It seems many of the issues the industry is grappling with emerge during the induction process when members first join an employer.

Mayuri Reddy, marketing strategist at SEB, said 74% of employers emphasise the member’s responsibility in a defined contribution fund when members first join, in other words, that members are responsible for the retirement outcomes (not the employer) and that they need to make sound decisions.

Reddy said 65% of employers provided access to information and told the members how and where they could access it, while 53% highlighted how important preservation was when members leave the fund.

However, 36% of members say they didn’t receive any communication on retirement benefits when they joined the company. Of those that did receive an explanation of retirement benefits during their induction, 57% said saving early was emphasised while 53% indicated that tax benefits came up quite strongly.

Reddy said although the industry believes it is stressing important topics like preservation and investments, only 12% and 19% of members respectively cited receiving this information.

She said members’ focus seems to be on those topics that affect their immediate environment like saving early and tax benefits, while decisions around preservation and investments are taking a back seat and are postponed to a future date.

What makes the situation even more concerning is that the 12% of members who recall being informed about preservation during their induction, represents just about 8% of the total sample.

– Reuters