• Elio E’Silva, Head of Direct Corporate Solutions

Individualisation is the key to a successful retirement

Individualisation is the next step in the evolution of defined contribution retirement funds and the key to a successful retirement, according to Alexander Forbes.

The financial group’s latest research shows that fewer than 10% of South Africans are retiring comfortably on 75% of their final pensionable salary. Elio E’Silva, head of direct corporate solutions at Alexander Forbes, believes that the core problem is that retirement fund members are treated as an “average member” rather than finding retirement solutions to cater for the “individual member”.

“Some lifestage models are essentially a default investment strategy that moves members from a more aggressive growth portfolio to a less aggressive investment portfolio as they approach retirement. This approach assumes that we need to protect what has been saved during the accumulation period leading up to retirement and is not always looking at what the ideal income for that individual member would be at retirement. The Alexander Forbes Goals-based LifeStage model introduced the idea of protecting income and not capital and have seen a slight improvement when members retire from the Alexander Forbes Retirement Fund. However, we believe that by introducing individualisation, we can improve the Alexander Forbes Goals-based LifeStage model by using more member data such as the date the member joined the fund, future contributions, current fund credit value, and salary information. This will assist in designing individual investment strategies, which are specific to each member at different stages of their working career.”

Nobel Laureate and MIT Sloan School of Management Professor Robert Merton compared funding in retirement to a doctor prescribing the same medication to all his patients. “Just as each patient responds differently to medication and has different symptoms, so too should our approach to retirement needs be personalised to suit each member’s individual needs and trade-offs,” Merton said.

Based on Alexander Forbes records, members use their statements to compare growth from one statement to the other and are not looking at the end goal. Unfortunately, the current format of typical statements lists accumulated savings and how these savings have changed in value over the period. Whilst it is important to keep an eye on the investment returns and fund credit, this will not provide members with enough information to take corrective measures to achieve their end goal.

E’Silva explains that by introducing individualisation the communication will be aligned to the individual investment strategy, which has the retirement income goal in mind. This will then provide members with regular updates to ascertain if they are on track to meet their goal at retirement, and what actions they can take if they are not. Personalised communication can help change member behaviour in the following ways:

  • The income target for the member in current Rand terms

  • The income that the member can expect to receive at retirement based on their current fund credit and contribution rate

  • The expected shortfall or surplus in income relative to the target set for the member

  • The expected impact of making contribution changes on the expected income

  • The expected impact of changing retirement age on the expected income

  • An analysis of the change in expected income due to contribution rate changes, investment returns and interest rate changes

“By introducing individualisation, the retirement industry is now able to target each individual member as the unique individual they are by providing communication and an investment strategy that is dynamic and personalised to try to improve the sad reality that affects a lot of South Africans approaching retirement. This approach aims to improve decision-making at each point of a member’s life, with increased contributions, nudges to keep retirement savings invested and member education to treat everyone uniquely. This will ultimately increase the chances of a successful retirement,” concludes E’Silva.