“When I said, ‘Til death do us part’ when I was 25, I didn’t realise I was going to live to 100.”
This was the tongue-in-cheek comment from a financial planner when the issue of longevity came up during a retirement discussion.
It is a subject not only married couples may be grappling with. Regulators worldwide are finding it difficult to reform retirement systems in a way that will allow people to support themselves when they are living much longer than in previous decades. In Japan, the old-age dependency ratio – the number of people older than 65, compared to those of working age – has increased substantially over the past 20 years.
Apart from increases in longevity, countries may also face structural issues that could make it difficult to come up with solutions. In South Africa, an unemployment rate of 27.5% makes it impossible to enforce a basic level of retirement saving. Compulsory preservation of retirement savings is a pipe dream. Over the last few years, local retirees have also had to grapple with dismal stock market returns, which made it very difficult to stay ahead of inflation.
Is there really a crisis?
How bad the retirement situation really is, is difficult to quantify. Commentators often say that only 6% of South Africans can maintain their living standard in retirement, but no one seems to know exactly where the 6% figure came from. Discussions with industry insiders who have been around the block suggest that this figure was already cited decades ago.
Findings from the Alexander Forbes Retirement Fund Member Watch suggest that only 5.2% of those who retired in the year through March 2018 were able to replace 80% or more of their last salary from their pension fund benefits. Because fewer than 10% of members preserve their benefits when they change jobs, the assumption is that in most instances there are no other savings available from which to draw an income in retirement. Yet even then, income may not be a good indication of people’s actual expenses in retirement.
Regardless of what the actual number is, various surveys and studies support the notion that most South Africans won’t be able to maintain their standard of living in retirement. In one recent study commissioned by Just, over one third of people said they couldn’t afford to lose any of their retirement fund money before it would seriously affect their retirement plans.
Why it’s so difficult
There are various reasons for the difficult situation many retirees find themselves in – non-preservation, low contribution rates, poor returns and high fees are just some of the problems.
The trouble is that saving enough for retirement effectively requires people to forfeit something today in the hope of having something better tomorrow. This becomes increasingly difficult in an environment where they may have lost their job and may need their pension to survive, or where they are just generally struggling to make ends meet. Figures from FNB Retail suggest that roughly 56% of middle income consumers (those who earn a gross monthly income of between R7 000 and R60 000) spend all their monthly income in five days or less after receiving it.
If getting by today is already a challenge, then planning for a better future seems an unrealistic expectation.
The introduction of treasury’s default regulations is an effort to address some of these issues by nudging people in the right direction. The approach is grounded in behavioural economics, something financial services group Discovery has had great success with. A recent study showed that Vitality’s shared-valued insurance model combined with Apple Watch have led to a sustained 34% increase in people’s physical activity levels.
The Discovery model rewards people who exercise regularly with weekly smoothies and monthly cashbacks. Ultimately, the expectation is that people will also benefit in the long run as they will be healthier, but the ‘benefits’ already become ‘visible’ after one week.
The problem with getting people to save for retirement is that there is no smoothie or movie ticket if you don’t cash out when you change jobs. Effectively, people need to make a sacrifice today (save more and spend less) to have a better future tomorrow. While the tax-free contribution to a retirement vehicle and tax-free compounding within the vehicle is a powerful incentive on paper, it is often invisible to the average pension fund member.
Retirement benefits counselling
It is in this area where retirement benefits counselling – which retirement funds will be compelled to offer from March 1, 2019 – can make the biggest difference. One industry stakeholder who is actively involved in the benefits counselling area says they can already see an improvement in preservation as a result of the counselling process, which highlights the punitive taxes that have to be paid if people cash out their benefits (immediately and at retirement).
The question is how funds will approach the retirement benefits counselling (the regulator has not been prescriptive as to how this should be done) and how it may impact the results over time.
For funds, the challenge is to demonstrate the impact of tax-free compounding over a 40-year savings horizon in such a way that people can see the ongoing benefits of consistent sound financial decision-making – not only at the point of retirement, but today.