All for one and one for all?
A few weeks ago, we published a newsletter where the challenge of designing a retirement savings system that would benefit all South Africans was highlighted.
The major challenge that came to the fore was the fact that South Africa is so culturally diverse that it is hard to establish a median, and therefore a system that would equally address the challenges of every sector of the population.
At the recently held Alexander Forbes Hot Topics Seminar on the Alexander Forbes Risk Barometer, Anne Cabot-Alletzhauser, Head of the Alexander Forbes Research Institute, pointed out that the problem is more complicated than we think.
Unlike other countries in the world, which are battling with ageing populations, South Africa’s population growth is greatest in the working population.
This is important because it provides the country with the opportunity to not only grow the economy, but to also address the challenges associated with retirement, provided that there is innovative thinking and a willingness for a new role-player to come to the fore and increase the role that they play.
“South African demographic trends mean that there is space for employers to become major role players when it comes to the retirement puzzle. Demographics show that enabling employees over their journey will be more important than the end goal of saving for retirement. We need a new contract with employees to do that,” said Cabot-Alletzhauser.
Lens of responsibility
In addition to the demographical challenges that the country faces, the lens of responsibility that South Africans face is significantly different to anywhere else in the world.
The traditional model of retirement is that a person saving for retirement is saving for themselves and their salary has to provide for their spouse and two children. In addition, once a person reaches retirement, their children will be out of the house and they have eliminated any significant debt.
This is not the case in the South African landscape. A person saving for retirement often has to save for retirement while providing for their family, aging parents or grown children who have not left the home, and extended family who may have to have their education needs catered for.
How can we expect a person to save for retirement when they have such a wide lens of responsibility?
Over the years, there have been a lot of statistics that have been associated with the retirement industry. One of these statistics is that only six percent of the population is able to retire comfortably.
This is a bit of a misrepresentation. Cabot-Alletzhauser pointed out that the statistic that needs to be highlighted is that only six percent of the population is able to achieve a replacement ratio of 75% at retirement age.
“There is a willingness on behalf of the public to save towards retirement, and there are people who contribute accordingly towards their retirement, even if they start saving at a late age.
The problem is that at times, decision makers when it comes to retirement (employers and human resources) do not talk to each other. Employers and employees will come to an agreement when it comes to retirement contributions, which will be higher than 15% of their salary, and human resources will be satisfied with this as until the employee reaches the magical 75% figure. This however may not be enough for employees who start saving late as they will be dramatically underfunded,” said Cabot-Alletzhauser.
There is a lot of talk about the challenges that the retirement industry faces, yet, there are very few solutions to the problem. How is this benefitting the industry?
“Singapore was in the same situation as South Africa a few years ago. They were facing a growing population that was very diverse; however, they made the decision that they were not going to be a welfare state. They couldn’t afford it at that stage,” said Cabot-Alletzhauser.
The Singapore Model is an innovative system that solves basic needs. Funding for housing, education, health, risk and retirement can consume up to 86% of a person’s annual income. An integrated employer offering can reduce this to 40%.
This is a fantastic proposal and will go a long way in at least establishing a good foundation of savings within the South African context. But, is there a willingness to do so? Cabot-Alletzhauser pointed out that since the move from defined benefits to defined contributions, employers have been happy to stand on the side-lines and embrace the fact that they face reduced risk when it comes to retirement savings.
Editor’s Thoughts: The Singapore Model can help the South African retirement industry stop treading water and form a platform for further engagement. Firm ground is needed. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts firstname.lastname@example.org.
Article published courtsey of FAnews