Only 50 percent of stand-alone employer-sponsored retirement funds and one third of participating employers in commercial umbrella funds actually target the minimum income that you should receive in retirement after a full working life of contributing to your fund, according to a startling finding of Sanlam’s annual Benchmark survey of retirement funds.
And even when retirement fund trustees decide on default investment strategies, which affect 80 percent of members of all funds surveyed, only 37 percent of participating employers in umbrella funds and 75 percent of trustees of stand-alone funds believe that the strategies they have in place will enable you to reach the targeted retirement income level over the long term.
In other words, the investments may not provide the returns required to meet the targeted pension at retirement.
Another reason why we as members do not save enough to provide an adequate pension in retirement is that two-fifths of retirement funds do not align how much you contribute to your retirement savings to the targeted retirement income level, the survey shows.
If your retirement fund’s consultants and trustees don’t make this a foundational principle, they cannot structure strategies to achieve this goal for you, Viresh Maharaj, the chief marketing actuary at Sanlam Employee Benefits, says.
These strategies include:
* Setting the level at which you contribute;
* The investments made, and default investments that suit your stage of life; and
* The pension (annuity) you need at retirement, he says.
The failure to set a retirement target compounds problems that members inflict on themselves, such as withdrawing their savings before retirement when changing jobs.
The survey shows that only 77 percent of stand-alone funds and 68 percent of umbrella funds provide members with information about the consequences of not preserving their retirement savings.
Maharaj says that retirement funds and how we, as members, contribute to them, can be compared to motor vehicles and where and how we drive them.
Like a motor vehicle, a retirement fund is an intricate set of interconnecting systems that all have to work together to get you to your destination, he says.
In practice, retirement fund systems are not connecting efficiently, Maharaj says.
First, you – or your retirement fund’s consultants and trustees – need to know where you are going, and then you need to set the right contribution level to achieve your target, he says.
If your fund does not have a contribution strategy aligned to a minimum targeted retirement income for its members, it is like planning to drive from Johannesburg to Durban without knowing if you have enough petrol to get there.
The role of retirement fund consultants and fund trustees should be to set a stated minimum target income that you should receive as an initial income in retirement and to understand the impact of the different strategies on the complex system of retirement funding.
The Benchmark survey shows the average employer contribution is 10.36 percent of members’ salaries for stand-alone funds and 9.54 percent of their salaries for umbrella funds, and the average member contribution is 7.27 percent for stand-alone funds and 7.07 percent for umbrella funds.
The average total contribution is therefore 17.63 percent for stand-alone funds and 16.61 percent for umbrella funds, the survey shows.
It also shows that 47 percent of stand-alone retirement funds and 40 percent of umbrella funds are reviewing contribution rates as a consequence of the recent changes to the Income Tax Act and the increased limit – 27.5 percent of taxable income or remuneration up to R350 000 a year – for contributions to retirement funds.
South Africa’s poor retirement savings situation is exacerbated by the fact that even if funds set retirement income targets, most members do not understand these targets, because the industry uses jargon. For example, the targets are often a percentage of your pensionable salary, which is typically less than your total salary, as it excludes allowances not included for the purposes of calculating your retirement fund contributions.
Maharaj says the average member does not understand that if your fund targets an income in retirement of 75 percent of final pensionable salary and your pensionable salary is 20 percent less than your income with allowances, your targeted retirement income is only 60 percent of your last total pay cheque (75 percent of 80 percent).
The Sanlam Benchmark survey shows that if you want to be a wealthy pensioner, you need to save more than your contributions to a retirement fund.
In interviews, 63 percent of members classified as affluent pensioners, who had contributed to an employer-sponsored retirement fund, indicated that they had also contributed separately to a retirement annuity fund.
Continuing the analogy of driving a vehicle, Maharaj says we use road signs to help us get from point A to point B. These include direction markers, stop signs, traffic lights and road markings. He says that, in a similar manner, communications from funds to their members should act as a series of signs that help members make better decisions in order to get them from day one of employment to day one of retirement.
If you drive from point A to point B, with possible stops along the way, you will reach your destination. But if you go round and round a traffic circle, you won’t get anywhere.
Maharaj says members who cash in their retirement savings are like drivers who go round and round a traffic circle indefinitely. Unfortunately, many South Africans will not reach their destinations, because they fail to preserve their retirement savings when switching jobs.
RISK COVER
Every journey has its share of bumps, and some journeys end in disaster. Features such as seatbelts and airbags are necessary safety measures for drivers and passengers.
Group life assurance, which covers death and disability, acts as a safety feature for retirement fund members.
However, Viresh Maharaj, the chief marketing actuary at Sanlam Employee Benefits, says that, on average, group life assurance offered by retirement funds or employers does not provide enough cover for its members, given the typical age profile and fund values of the South African employee base. He says a large number of members do not have any additional life cover beyond funeral cover.
The Sanlam Benchmark survey shows that the average total cover is 6.44 times annual salary for stand-alone members and 6.42 times annual salary for umbrella fund members.
Statistics South Africa’s research shows that the average retirement fund member supports 3.5 dependants from their salary, with some blue-collar workers supporting more than 10 dependants.
Should the breadwinner die or be disabled, the group life cover payout at this level would be spread across too many mouths to make a material difference to the lives of the member’s dependants.
Maharaj says that while the cost of group life assurance has been dropping because of competition and lower claims, premiums may now have bottomed out. As a result, funds will have to pay more attention to costs and how their group life assurance is structured.
He says that, currently, only 29 percent of stand-alone funds and 32 percent of umbrella funds offer flexible risk benefits that let you choose your level of cover. The most popular type offers you a core amount of cover and lets you decide how much more cover you want above that minimum.
A small number of funds use the more modern lifestage approach, where either the cost of cover or the level of cover varies in line with your age.
A hybrid approach is one where the core cover varies depending on your age and where you can increase the cover to certain limits that depend on your age. The rationale for such an approach is that younger people require more cover, because they have young children as dependants.
As you age, your retirement savings should grow and your children should move closer to independence, so the amount of cover you need can be reduced.
Maharaj says group life cover must also allow for changing family models in South Africa, whereby couples are having children later in life and grandparents are having to take care of grandchildren.
COSTS
Your vehicle has running costs, including for fuel, repairs, servicing and wear and tear. Retirement funding also has costs. Funds have to be administered, the assets have to be invested and trustees often use consultants to advise them.
The costs of running your motor vehicle are easy to understand. Against this, 48 percent of the stand-alone fund trustees and principal officers and 57 percent of the umbrella-fund-participating employers who responded to the survey say it is difficult to compare the costs of retirement funds, and 21 percent of stand-alone fund respondents and 19 percent of umbrella fund respondents say “it is very difficult to do so”.
This means it is difficult for principal officers, trustees and employers to shop around for the best deals and to compare products.
The Sanlam Benchmark research showed an inverse relationship between fund size and the cost of administration. Funds of more than 10 000 members pay costs of 0.48 percent of members’ salaries, on average, compared to 1.85 percent for stand-alone funds with fewer than 500 members and 0.44 percent for umbrella funds with fewer than 500 members.
The average cost of a stand-alone fund with fewer than 500 members is therefore 98 percent higher than the comparable umbrella fund.
When expressed in rands, the average cost of saving in a retirement fund is R54 per member per month for a stand-alone fund and R40 for an umbrella fund ,with large stand-alone funds paying R33 per member a month.
Stand-alone funds with fewer than 500 members pay an average of R113 per member a month against R49 for umbrella funds. In this segment, stand-alone funds are 130 percent more expensive than the comparable umbrella funds.
Viresh Maharaj, the chief marketing actuary at Sanlam Employee Benefits, says that while serious effort has gone into reducing costs over time, and more effort is required, it is unhealthy to fixate on costs.
He says focusing solely on costs distracts from the other ways in which value can be added to the retirement funding system, such as encouraging members to save more and to preserve their retirement savings.
INVESTMENTS
Engines propel a car forward. The better the engine, the better the car. Investments are the engines of wealth creation in retirement funding, as they deliver the growth that results in the power of compound interest, Viresh Maharaj, the chief marketing actuary at Sanlam Employee Benefits, says.
Some of the world’s most exciting vehicles now use more than just one type of engine to achieve the right performance from the right sources at the right time. In a similar vein, funds can make use of active and/or passive investment strategies and these are no longer viewed as mutually exclusive in a portfolio, Maharaj says.
An active investment strategy is one in which a fund manager makes the investment decisions, while a passive strategy is one that tracks an index, such as the FTSE/JSE All Share Index.
If you are given a choice of retirement fund investments, you need to make considered choices, as they can have a significant effect on your retirement funding, Maharaj says.
For example, when you are younger, you need to be aggressively invested in equities to provide the best returns. But you should move to more conservative investments as you get older to protect your wealth.
He says the Sanlam Benchmark research shows umbrella funds use both passive and active investment management.
Funds have default investment strategies for members who do not select their own investments.
The survey shows that seven percent of stand-alone funds and 5.4 percent of umbrella funds invest exclusively in passive portfolios for their default investment strategies; 54 percent of stand-alone funds and 17 percent of umbrella funds invest exclusively in active portfolios in their default investment strategies; and 34 percent of stand-alone funds and 47 percent of umbrella funds invest in both in their default portfolios.
In default choices offered to members, 60 percent of stand-alone funds and 52 percent of umbrella funds were lifestage portfolios, which gradually lower the risk-return profile as you age, and 25 percent of stand-alone funds and 17 percent of umbrella funds were invested in balanced funds, which invest across the asset classes without taking individual members’ investment risk exposure into account.
Nine percent of stand-alone funds and 26 percent of umbrella funds make use of smoothed-bonus investments as part of their default portfolio.
ADVICE
Many of us as drivers use a GPS device or the GPS on our smartphones to help us navigate when we don’t know how to get to our destination.
Viresh Maharaj, the chief marketing actuary at Sanlam Employee Benefits, says advice is the navigation system you need to reach your desired retirement outcome.
He says the Sanlam Benchmark research revealed a real advice gap. Pensioners indicated that close on three-quarters of them first received retirement planning advice only within 10 years of retirement.
“This is potentially one of the key contributing factors to the poor retirement outcomes experienced, as high-quality financial advice has been shown to make a material difference to retirement outcomes.
“The pensioners themselves illustrate this point. While a core group of pensioners highlighted saving earlier as the key tip for building retirement wealth, the sample containing pensioners with higher retirement incomes cited starting to plan earlier as the key enabler of wealth creation,” Maharaj says.
RETIREMENT INCOME CALCULATOR
Do you want to know what percentage of your income you are likely to receive as a pension in retirement? Try Sanlam’s Day One Member Tool at the link below.
To use the calculator you will need to know your:
* Total guaranteed package for the year: the total before tax amount your company pays you, including any allowances and bonuses.
* Pensionable remuneration: The annual income on which your retirement fund contributions are calculated – this is typically your salary less any allowances and bonuses and is typically 70 to 80 percent of your total guaranteed package.
* You will also need to know what percentage of your pensionable remuneration you and your employer jointly pay as contributions to your retirement fund.
* If a portion of the contribution paid by your employer is used to fund group life benefits for you or to pay costs, you also need to enter this information.
The calculator will work out for you the percentage of your total income that you will receive as a pension in retirement if you continue to contribute at your current rate (your replacement ratio). It will make a suggestion regarding the level of your salary you need to make as a contribution to your retirement fund in order to achieve a pension equal to 75 percent of your income at retirement. You can adjust this targeted replacement ratio as well as your retirement age to see how this affects your income in retirement.