Moves to improve your lifestyle in retirement

Sanlam’s Benchmark Survey, which interrogates100 stand-alone retirement funds and 100 participating employers in umbrella funds, is a barometer of the state of employee benefits in South Africa. reports

RETIREMENT funds are paying more attention to your financial situation when you retire and doing more to align your contributions with a pension that will allow you to maintain your lifestyle in retirement, according to the latest Sanlam Benchmark Survey on employee benefits, released recently.

The 2018 survey of stand-alone funds and participating employers in umbrella funds shows that 67% of stand-alone funds have a stated target pension (usually expressed as the net replacement ratio) that the trustees actively work towards, as against 48% in 2016. For umbrella funds the figures are lower: 25% as against 29% two years ago.

Of the funds and sub-funds that replied “yes” to this question, 83.6% of stand-alone funds and 72% of umbrella sub-funds have a default contribution rate that is aligned with the target net replacement ratio for members (as against 60.4% and 62.1% in 2016).

The net replacement ratio is the percentage of your final salary that you will receive as a pension, given certain assumptions about your post-retirement investment returns, and most funds surveyed (74.6% of stand-alone funds and

84% of umbrella sub-funds) are targeting a ratio of 70 to 75%, which the industry sees as being sufficient for most people to maintain their lifestyle into retirement.

If you achieve a 75% ratio with your savings, on a final basic salary of, for example, R40 000 a month

(the ratio does not take into account additional income such as bonuses or travel allowances), your first monthly pension cheque should be about R30 000.

Retirement funds’ efforts to improve the retirement outcomes of their members are in line with, and may largely be attributed to, the introduction of legislation known as the retirement fund default regulations, due to come into effect on March 1 next year.

But funds can do only so much – the rest is up to the members themselves. When funds were asked what percentage of their members would be able to maintain their lifestyles in retirement, 44% of stand-alone funds and 63% of umbrella sub-funds indicated that less than 10% of their members would be able to do so.

Viresh Maharaj, the chief executive of client solutions at Sanlam, speaking at the Benchmark Symposium held around the country this week, says this indicates that although contribution levels are reasonable, “something goes horribly wrong along the way”, alluding to members withdrawing their retirement savings in cash when they change jobs.

The problem of non-preservation is also being addressed in the default regulations, with the imposed introduction of access to retirement benefits counselling for members who are retiring or changing employers (see “Will your pension fund provide adequate advice when you resign or retire?”, Personal Finance, May 19, 2018, at www.persfin.co.za).

INVESTMENT STRATEGIES

One fact to come out strongly in the research – and research worldwide supports this – is that most retirement fund members stick with the investment strategy of the fund, or its default option, rather than a strategy in which they can choose the underlying investments.

When asked in what investment options their members were invested, 62% of stand-alone funds and 60% of umbrella sub-funds said that between 80% and 100% of members were in their default options.

Many funds have as their default option what is known as a “lifestage” portfolio (59% of standalone funds and 48% of umbrella sub-funds polled). Here, the risk component (the allocation to volatile assets such as equities) is reduced as you approach retirement, so that in the years leading up to your retirement your savings would be less affected by a market crash.

However, this can lead to problems when you retire and purchase a pension, or annuity,