Retirement fund contributions: Where is the bull’s eye?

Sanlam survey highlights miserable position of many pensioners; see infographic.

JOHANNESBURG – Only 30% of pensioners believe they have enough capital to last the rest of their lives.

This is according to the Sanlam (JSE:SLM) Benchmark Survey 2013 released on Tuesday. The survey is based on interviews with a range of retirement industry parties, including principal officers of standalone retirement funds (100 respondents), employers of umbrella funds (100) as well as members of retirement funds (500) and retirees (251).

Danie van Zyl, head of guaranteed investments at Sanlam Structured Solutions, says a third of pensioners have depleted the lump sum they received on retirement and half of that group has done so in less than two years.

Half of the pensioners interviewed experienced a significant drop in income after retirement and just over half experienced a shortfall between their income and expenses on a monthly basis. The majority of pensioners were unable to save for unexpected expenses, he says.

‘I listened, nodded and signed a form’

While the retirement industry is currently in the process of significant reform that will hopefully address some of the issues it is facing, it seems that some of the problems start as soon as the first day of employment. Van Zyl says new employees are bombarded with a large number of administrative forms at a new job, and for many it is an overwhelming experience.

According to the survey, one in five members who joined a pension fund in the last year received no assistance from their human resources department. A third admitted that they did not have sufficient knowledge to fill in these forms, he says.

Alarmingly, 90% of new employees never reviewed their decisions.

How much is enough?

Van Zyl says few pension funds actually spelt out to members what pension they are targeting. However this is changing – 41% of funds now have a targeted pension (up from 35% last year) and most of them use a replacement ratio. The replacement ratio is an indication of the percentage of the final salary that a pensioner would need after retirement.

Van Zyl says principal officers indicated that members would need around 87% of their final salary to be able to live beyond their current standard after retirement, regardless of their income.

Replacement ratios to maintain a certain living standard after retirement

  Monthly income before retirement
  R10 000 to R25 000 R25 000+
Survival 62% 61% 58%
Maintain current standard of living 76% 74% 72%
Living beyond current standard 87% 88% 87%

Interestingly, pensioners had more frugal perceptions of earnings required, especially in the lower income bands. Their perceptions were as follows:

  Monthly income before retirement
  R10 000+
Survival 52% 63%
Maintain current standard of living 68% 79%

Van Zyl says this is possibly an indication that they have experience of what survival really means.

He says that to achieve a replacement ratio of 70%, the contribution would have to be around 14.6% of their income for 40 years with an annual return of inflation plus 5.5%.

Tracking your progress

In line with this thinking, the target would be for the average Joe to try and save two times their annual salary after ten years of employment. After twenty years, four times, after thirty years seven times and after 40 years, twelve times. Van Zyl stresses though that there are no hard and fast rules that would apply to everybody.

However, in the context of longevity and more subdued investment returns, the need to start saving for retirement early on, cannot be stressed enough. Says Dawie de Villiers, chief executive officer of Sanlam employee benefits: “Gone are the days where high returns are going to make up for a lack of savings.”

Adds Wagieda Suliman, Sanlam Investments Business Intelligence Manager: In the end the research indicates that a comfortable retirement is not a function of the amount of money people earn, but about their behavior in the period leading up to retirement.


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