The most reliable way to forecast the future is to try and understand the present - John Naisbitt.
One of the biggest criticisms of the retirement industry, which is being driven by societal changes, is that the future is so unpredictable that it is almost impossible to save for retirement. Therefore, the quote by Naisbitt offers a solution (albeit a vague one) to the biggest challenge that currently exists in the retirement industry.
The solution does make sense if we take a step back and contemplate it. Any complicated mathematical or scientific equation can be solved if the equation is broken down into its basic parts. This was discussed at the 2019 Sanlam Benchmarks Survey.
When a highly anticipated product is launched, there is a lot of fanfare and interest that is generated around it. Driven by FOMO (the fear of missing out), some even flock towards these products just so that they can say that they have socially arrived. If these products are good enough, they gather a considerable following whose brand loyalty sustains the company.
The equivalent of this in the South African retirement industry was the introduction of umbrella funds. When they were introduced in the industry, there was a lot of fanfare and general interest because of the cost saving possibilities that they promised. However, there was still a major following that favoured standalone funds because industry loyalists preferred the reliability they offered.
This changed. According to Viresh Maharaj, Chief Executive Sanlam Corporate Sales & Marketing, there has been a major consolidation of standalone funds into umbrella funds which has seen the later grow into the industry’s dominant force.
“Between 2005 and 2019, 45 000 members joined umbrella funds. Even if some of these members joined because their standalone fund was consolidated with an umbrella fund, it is still a statement of intent when it comes to the value that umbrella funds offer. This growth will continue going forward,” said Maharaj.
In the beginning, the interest around umbrella funds was centred around the fact that costs – as well as risk – could be spread equally among members of the fund which promised significant savings.
However, the allure of umbrella funds grew beyond the fundamental savings message to include:
greater governance because of the principles stipulated in King IV;
greater member engagement which is driven by technology;
greater information security which is inherent in both umbrella and standalone funds as the industry becomes serious about addressing the cyber challenge;
the Default Regulations which have been implemented by the Financial Sector Conduct Authority; and
the sheer scale that is present in umbrella funds is unmatched.
The popularity of umbrella funds has been beneficial to the retirement savings industry because it added much needed variety at a time when it was desperately needed. However, this can also be a curse.
“According to research done by Sanlam Employee Benefits, 33% of the 100 funds that were surveyed for the 2019 Benchmarks Survey said that they have never assessed whether umbrella funds are the best options for members. This needs to be reduced to zero and the industry needs to take urgent steps towards this,” said Maharaj.
Maharaj added that 36% of the members within the 100 funds that were surveyed for the 2019 Benchmark Survey were considering their options when it comes to their future in the industry and were actively considering making the switch toward umbrella funds. Further, 48% of policyholders review the appropriateness of the standalone vs umbrella debate every three years.
Top of mind
Another current influencer, which will impact the future of the retirement fund industry, is the economic climate that we live in. The economic climate is tight and there is a significant focus on cutting costs or at least maintaining them wherever possible.
In addition to retirement funding, healthcare costs need to be considered. “Healthcare costs are immediate and visible. Over the past few years, medical increases have exceeded CPI. How does this affect retirement funding? The attention paid to medical costs competes with retirement funding in terms of attention and urgency. Costs is the number one issue that EB Consultants wish would change. However, this needs to be a drastic change. Research has shown that marginal changes in the industry (when it comes to costs) do not move the needle significantly in any specific direction,” said Maharaj.
Not all trends impact the industry in a challenging way.
“The Default Regulations have been a welcome inclusion in the industry. Seventy eight percent of the EB Consultants that were surveyed for the 2019 Sanlam Benchmarks Survey believe that the Regulations will contribute towards financial resilience. It will help retirement funds implement intelligent default ecosystems that will encourage saving,” said Maharaj.
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