We have reached the halfway point of 2021, and the year has been eventful: South Africans from all walks of life have been working tirelessly to re-establish a sense of normalcy following the challenges of the previous year, particularly the COVID-19 pandemic.

Amid this period’s insecurity – an aspect of our shared experience – it continues to be a challenge to plan, and it is not always easy to imagine what the future holds for us as individuals, as a country, and as a global community. However, it is important to remember that we still have agency in many aspects of our personal and professional lives, and it is important for employees to understand the risk and retirement benefits available to them.

Members need to familiarise themselves with their level of accumulated retirement savings at various points in time and reflect on whether they are on track to meet their retirement objectives.

Below, I’ve included some considerations for members of retirement funds who want to improve their ability to achieve a more comfortable retirement. Members can improve their retirement outcomes by increasing the amount of money allocated to retirement savings.

As a starting point, they can simply increase the amount they contribute to their retirement savings. Another – frequently overlooked – method is to reduce associated costs, while another is to consolidate savings across various retirement funds.

I hope that these provide insight into the different levers that can be considered to help improve your retirement savings and improve your ability to retire comfortably.

Liberty continues to aim to support you through 2021 and we remain focused on our core purpose of being “In it with you,” while you strive towards a comfortable retirement.

The impact of retirement fund costs on a member’s retirement outcome

It is essential for members of retirement funds to understand the impact of fees on their retirement outcome and what could be done to influence this.

Costs incurred by retirement funds can have a significant effect on the final value of a members’ accumulated retirement savings. As most employers fix the total contribution rates that they make to a retirement fund on behalf of their employees, lower fees will result in higher net contributions to retirement savings. In other words, more money will be allocated to retirement savings and therefore a better final outcome.

For example, for every 1% more that is contributed towards retirement savings, the ultimate benefit at retirement increases by approximately 10%. This assumes that a member has worked for 40 years and that their investment has earned a real return of 3% per annum. Regularly reviewing the costs and options in one’s retirement fund could have a substantial impact on a member’s ability to retire comfortably.

Costs associated with retirement savings

To reduce costs associated with retirement savings, it is necessary to understand the levers to consider, by understanding the fees that may be charged. However, it is also important to keep in mind that the net investment return (investment return less fees) is key in what determines the accumulated value of retirement savings, so one should not just base one’s choice solely on cost.

This section outlines the categories of charges that may be applicable.

Investment management charge

The investment management charge is the total amount charged for managing the retirement savings investments and is dependent on the investment portfolio choice and level of assets. It includes investment management fees, any performance or guarantee fees, investment administration fees as well as asset handling fees which are charged when making use of investment portfolios managed by asset managers outside of the Liberty Group.

Note: For Liber8 clients, investment administration fees are not charged separately. For Corporate Selection clients, these are charged for separately.

Advice charge

The advice charge is the amount paid towards the provision of advice and intermediary services. It includes commission for the provision of advice by brokers or financial advisers, which is based on the total premium paid by the employer and is typically negotiable, as well as investment consulting fees not included within the investment management charge.

Administration charge

These charges cover the expenses of administering the retirement benefit and are in the form of a monthly administration fee, which may include a distribution cost, where applicable.

Other charges

These charges relate to the costs incurred from governing the retirement savings account (Governance levies) as well as levies imposed by the Financial Sector Conduct Authority (FSCA). It could also include other charges, where applicable, such as premiums or charges for guarantees.

An Effective Annual Cost (EAC) report provides a view of the current costs associated with existing retirement savings for members. To request an EAC report, members or fund financial advisers (on the member’s behalf) can contact the Liberty Corporate call centre on 011 558 2999 or lc.contact@liberty.co.za

Cost of risk benefits

In addition to the above, risk benefit charges for risk benefits such as life cover, disability cover and funeral cover, are also applicable within umbrella fund solutions. These costs depend on the risk benefits provided or taken up within the umbrella fund options selected by employers on behalf of their employees.

Because umbrella fund solutions are bundled offerings of risk and retirement products, the lower the premiums paid towards risk benefits, the higher the net contribution to member’s retirement savings. This is because the risk benefit premiums are deducted from the total contribution amount paid, with the balance put towards the member’s retirement savings account.

A possible reduction in risk benefits, and hence risk premiums, should be balanced with the need for adequate risk cover to provide for the financial needs of members and their dependants in an unexpected life event. Additionally, it is important for members to review their risk benefit cover levels after important life events, such as the birth of a child, or the purchasing of a new home.

Members should also be aware that risk benefits are typically cheaper when taken up through an employee benefits solution, such as through umbrella fund solutions (for groups of employees priced together) compared to when purchasing individual cover.

Levers to help improve retirement outcomes – Increasing savings through reduced costs

Investment portfolios have different investment management fees. By choosing to invest retirement savings in an investment portfolio with lower investment management fees, it may be possible to reduce costs. However, this should be considered along with one’s risk profile (ability/ appetite to take on risk and attitude to risk), investment time horizon and retirement goals, which a financial adviser can assist with.

Again, it is important to keep in mind that the net investment return is what determines the accumulated value of retirement savings, so one should not just base one’s choice solely on cost.

The graph below illustrates an example of the potential impact of a 0.5% reduction in investment management fees on an individual’s expected accumulated retirement savings, over their working lifetime.

Assumptions: The individual contributes 16.41% of their pensionable salary towards their retirement savings from age 20 until their retirement at age 65; The individual has a starting salary of R240 000 per annum; Pensionable salary is 70%; Inflation is 6%; Salary increases monthly at an effective annual rate of inflation + 1%; The individual is invested in Liberty Core Balanced, Expected return is CPI+6% (gross); Projections are shown in today’s money terms; All fees except for the investment management fee are ignored; Investment management fees used are 1.0% and 0.5% p.a. (inclusive of VAT); 5% income drawdown rate (ASISA recommended rate for females) is used to determine the monthly retirement income.

By reducing the investment management fee by 0.5%, the individual can expect to accumulate R780 000 more in expected retirement savings, i.e. R6.04 million at age 65 relative to R5.26 million if there was no reduction in fee.

This would allow the individual, at retirement, to purchase an annuity which could provide them with a retirement income of R25 100 per month compared to R21 910 per month if the investment management fee was not reduced.

Reducing costs earlier is likely to have a greater impact on retirement savings due to the effect of compounding interest.

Levers to help improve retirement outcomes – Increasing savings through additional contributions

If members can afford to do so, making additional voluntary contributions (AVC’s) may increase their expected retirement savings. Larger AVC’s may have a greater impact on retirement savings, as illustrated below.

Consider an individual who contributes 16.41% of their pensionable salary towards their retirement savings from age 20 and continues to do so until retirement at age 65. This would result in expected savings at retirement of R5,26 million, which would allow them to purchase a retirement income of R21 910 per month. The impact of different levels of additional contributions (made annually) on the individual’s retirement savings and income at retirement is illustrated in the graph below.

Assumptions: The individual is invested in the Core Balanced portfolio; Expected return is CPI+6% (gross), The individual has a starting salary of R240 000 per annum; Pensionable salary is 70%; Inflation is 6%; Salary increases monthly at an effective annual rate of inflation + 1%; All projections are shown in today’s money terms; All fees are ignored; AVC’s are made in the individual’s first retirement contribution and one year later thereafter until retirement; 5% income drawdown rate (ASISA recommended rate for females) is used to determine the monthly retirement income.

If this individual makes additional contributions of R500 per year, they would have R83 502 more in expected savings at retirement. Larger additional contributions of R2000 per year would provide this individual with R334 009 more in expected savings at retirement. This would allow them to purchase an annuity which provides them with a monthly retirement income of R23 302 per month compared to R21 910 per month if they do not make any additional contributions.

Increasing retirement savings through AVC’s is easy – members just need to notify their fund financial adviser or Human Resource representative when they would like to make an additional contribution, and the amount they wish to make. Members could consider making AVC’s when receiving extra money during the year, such as a bonus or a 13th cheque, if affordability allows and they are able to save it.

Reducing costs or making additional contributions to increase retirement savings should always be done by considering members’ unique financial circumstances and retirement goals. It is recommended that members contact their fund financial adviser for professional advice before making important financial decisions.

Levers to help improve retirement outcomes – Consolidating retirement savings

Consolidating retirement savings may not be the first thing that comes to mind when wanting to achieve a better retirement outcome, but it may play a significant role in helping members reach their retirement savings goals. By consolidating retirement savings, members are able to benefit from greater retirement savings and lower costs. Below are two important points of consideration for employers and members when it comes to consolidating retirement savings.

Hybrid retirement funds were historically established by employers to maximise benefits provided to their employees. Under this arrangement, employers’ contributions toward their employees’ retirement savings are made in a provident fund, while members contribute into a pension fund to allow for maximum tax-deductibility (as member contributions into the provident fund were not tax deductible at the time).

However, with the introduction of several retirement fund reforms over the past few years, and with the most recent reform on 1 March 2021, these hybrid retirement fund arrangements have become less beneficial.

The Taxation Laws Amendment Act 2015 harmonised the tax treatment for retirement fund contributions between the different types of retirement funds, while the 2020 Taxation Laws Amendment Act meant that from 1 March 2021, employers and members can now also benefit from enhanced tax-free transferability between retirement funds. Together, these changes mean that hybrid retirement funds may no longer be as beneficial as they once were, given the reasons for which they were originally established.

It may now be more advantageous to consolidate funds within a single retirement fund as it results in greater cost efficiencies due to only having to operate one fund and economies of scale. Reduced costs mean that more money can be allocated towards members’ retirement savings and, with the added effect of greater compounding interest on these higher amounts, helps members to ultimately achieve a more comfortable retirement.

It is important that members consult their fund financial adviser before making the decision to transfer their accumulated retirement savings to another retirement fund, as the appropriateness of the options available to them will depend on their specific individual needs. As an example, pre-retirement accessibility rules of different retirement funds may differ and may not meet specific needs.

Many employees that have been members of retirement funds at any time during their working career may be, unknowingly, missing out on benefits that are due to them. It has been estimated that across a number of South African pension funds, a total of R43 billion unclaimed benefits are currently due to at least 4.8 million people. Liberty believes that there are over 200 000 members who could still claim their share of a pooled R2.3 billion. This indicates that many employees or their families may be missing out on a significant amount of money which could be used to live more comfortably during their retirement.

Liberty has a dedicated tracing task force that traces such beneficiaries to ensure that they receive the benefits that are owed to them. But even so, due to out-of-date contact details or documents that were submitted incorrectly or incompletely during registration, there remains a large portion of individuals that have not received the money due to them. We therefore urge members to take a few minutes to ensure that they have submitted the necessary documents for their nominated beneficiaries and that their contact information is correct and current. This will speed up the process of getting the benefits to beneficiaries if ever required.

Employees currently contributing towards a retirement fund who have unclaimed benefits from a previous employer may consider consolidating these funds into their current retirement fund. The benefit of doing so may directly impact their accumulated retirement savings, and therefore their level of comfort during retirement. This is mainly because, as above, cost efficiencies are created in consolidating funds into a single retirement fund.

Members can confirm for themselves if they or their families are owed benefits. With Liberty, members can visit https://www.liberty.co.za/unclaimed-benefits or call 0860 456 789.

Across South Africa, members may also make use of the built-in search engine on the FSCA website at www.fsca.co.za.

ENDS

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