Companies have a role to play in tackling our pension crises
As a new report finds that many pension fund members wish they knew more about their funds, 10X Investments CEO Tobie van Heerden urges employers not to waste the opportunity to teach corporate fund members the financial facts of life.
The 2021 edition of the 10X Investments South African Retirement Reality Report points to a steadily deteriorating pension outlook for South Africans: compared with the inaugural report published in 2018, even fewer people now look forward to a comfortable retirement. This is happening across all age groups, demographics and income levels.
Partly, this reflects our economic crises, which the government must address, and partly our poor savings culture, where employers and regulators can intervene.
The report is based on results of the Brand Atlas survey, which tracks the lifestyles of the 15 million economically active South Africans in households earning more than R8,000 pm. Alarmingly, that modest cut-off already excludes two-thirds of households in the country.
To address this aspect of the pension crises – the 35m adults who live below the poverty line, according to Stats SA – we need to solve our economic crises. South Africa is caught in a vicious cycle of low growth, low employment, low saving and low investing.
But even among the ‘fortunate’ minority who have an income, half admit they aren’t providing for retirement at all, with two-thirds having nothing left to save at the end of the month.
Among those who do have the capacity to save, 79% still fear they won’t have enough, or feel unsure. A mere 7% are not worried.
These high levels of concern present across all income brackets. Although the outlook has deteriorated most in the lower band (people who live in households with less than R20k per month): (84% versus 76% last year), 70% of those in high-income households (R50k or more) are also stressed.
What is sometimes missing is less the ability than the application to save. Only 8% are executing a well-considered retirement savings plan. This neglect manifests in hubris and unrealistic expectations.
Almost half these respondents believe they can secure a comfortable retirement within 30 years or less, rather than a full working life of 40 years, a fallacy which will cost them half the pension they might have.
Perhaps the value of time needs to be learnt the hard way. Some 35% of under-35s hope to retire below age 60, but only 4% of over-50s still consider it realistic; two-thirds now expect to retire beyond age 64, or not at all. But that, too, is wishful thinking in a country like ours, which has the highest structural unemployment rate in the world. Tellingly, 29% of retirees in the survey were forced out of work before they were ready to leave.
More than half (53%) of those with some sort of a retirement savings plan belong, or have belonged, to a corporate scheme. One would think that this would have exposed them to the basic concepts of retirement saving.
Yet 60% still cashed out their savings given the chance to do so. Understandably, many are more worried about immediate survival than the opportunity cost of an early withdrawal. But, even before the pandemic, the majority habitually cashed in their entire balance whether they had an urgent need or not.
Perhaps they weren’t aware of the option to withdraw a portion and preserve the rest: 61% of current or former corporate fund members admitted they knew little or nothing about their fund.
Three in five wished they knew more, so their ignorance is not entirely due to disinterest. The onus is on employers to make the subject more engaging, and not waste the opportunity to teach corporate fund members the financial facts of life.
Compulsory benefit counselling for exiting members is a good start, but that should be supplemented with mandatory savings counselling for joining employees. This needs to go beyond a link to a fund brochure; it should incorporate formal retirement planning, using online tools. A plan that sets a goal and connects future pension to current income, savings rate, time horizon and the expected return on their portfolio is more likely to engage employees.
If nothing else, it would dispel illusions that they can achieve their goal by saving 5% or 10% of income, or within 30 years, or by investing defensively.
Financial education won’t, however, cure lack of conscientiousness and self-control, or the habit of treating retirement savings as a piggy bank. National Treasury said as much when it proposed to legislate against such “systematic irrationality” in its retirement reforms.
In the end, it chose to “nudge, rather than force” individuals to make decisions in their long-run interest. But South Africans tend not to respond to nudges, they need a good shove. Better outcomes must be legislated.
Treasury’s recent proposal, to let savers access a portion of their fund provided they save the rest to retirement, is a pragmatic solution that balances short and long-term needs and lessens the state’s burden at both points.
These survey results won’t come as a surprise: the pandemic has dragged our society’s vulnerabilities into the spotlight, and provided a stark reminder that for many, financial hardship is not only a retirement prospect, but just one or two missed pay cheques away.
The report confirms that the need to build financial resilience and sustainable lifestyles in our communities is now beyond urgent. More saving and investing is one way to achieve this. The government, employers and regulators must all play a role to make this happen.