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Lockdown forced many to dip into retirement savings to make ends meet – report

The report also indicates that 49% of respondents have no retirement plan at all: Chris Eddy from 10X Investments.

NOMPU SIZELA: Investment manager 10X released its third iteration of the Retirement Reality Report. Previous reports have highlighted the fact that the vast majority of working South Africans are not putting themselves in a position where they’ll be able to retire comfortably. And this year, with the economic impact of the Covid-19 pandemic, the outlook has further worsened.

Well, to tell us more I’m joined on the line by Chris Eddy. He’s the head of investments at 10X. Thanks very much, Chris, for joining us. So, what were some of the key findings from this year’s Retirement Reality Report?

CHRIS EDDY: Thank you very much, Nompu. I think the 2020 report additionally revealed – and just for context it’s the third year that this report has been running – that the retirement crisis situation for many South Africans hasn’t really evolved through time. If you look, going back all the way to 2013, about 6% of South Africans are able to retire comfortably. And, when we say “retire comfortably”, we mean maintain the standard of living that they had while working, in retirement. Some of the stats were estimated by National Treasury. And what the report this year showed is that only 6% of respondents said that they had a plan that they were confident in executing which would see them to retirement. So you can see some sort of corroboration of that statistic .I think the scary part is that 49% of respondents said, “I actually don’t have any plan at all”.

To give you context, the survey tracked the lifestyles of about 15 million economically active South Africans whom the sample looked at. When we are talking about “economically active”, we’re talking about household incomes greater than R8 000, because we were tracking a large universe of South Africans. So it’s quite scary to see that only 51% have some sort of plan. And, out of that, only 6% are really confident that it will get them to retirement.

NOMPU SIZELA: Not good at all. It does seem that the Covid-19 experience has really exposed South Africans in terms of not saving for a rainy day. I speak in terms of those who have means, as we know of course that there are millions of people in the country who don’t.

CHRIS EDDY: Certainly. And I think that it potentially provides some sort of window into the future of being in a situation where, when you get to retirement, and you are no longer earning an income, you could find yourself without sufficient savings to get you through that period. So this could be a bit of a preview of what many South Africans may experience if they don’t take active decisions today to try to change that outcome.

I think one of the biggest key takeaways from the report is that there seems to be a massive disconnect between different expectations of South Africans.

To give you a bit of a bit of an insight into that, about 75% of South Africans were not sure whether they would have sufficient savings to retire on – so there is that concern about potentially not having enough money – and  77% also responded saying that they think they’ll have to continue earning more money. So there’s a large portion of South Africans saying: ”We don’t think we’re going to have enough money saved up to support ourselves.” But, at the same time, 68% of respondents said that they expect to maintain the same standard of living when they hit retirement.

So this is massive disconnect between understanding that potentially there’s not enough provision made to support one’s lifestyle, and not knowing how that feeds through into impacting their lifestyle when they are in retirement. So I think that massive disconnect is part of the concern and the problem, and it really talks to many South Africans not really being engaged with the process and thinking what the key drivers are to getting myself towards retirement..

NOMPU SIZIBA: Yes. Do we know some of the reasons why people say they they’ve struggled to save for retirement?

CHRIS EDDY: We looked at those people who have a plan and those people who don’t have a plan. Of the people who don’t have a plan, we know that [with] incomes in South Africa, many people can’t afford to save. And 56% said they just can’t afford to plan, because they don’t have enough money left at the end of the month. Quite staggering, really, that there are about 50% that just said it’s not a priority for them at this stage of their life, and another 18% said they’re not planning on retiring. So if you unpack those two a little more, of those who said they’re not planning on retiring, in the South African context that is probably not a great assumption to be making relative to the population of South Africa, with many people entering a working age or between 15 and 25. And it would be quite difficult, given the population dynamic, I think, for a lot of people closing on retirement age to really defend their job relative to the population dynamics.

So most people don’t have that option of continuing to work through retirement. I think, from those who just said that it’s not a priority at this stage of their life, a lot of us in the industry potentially may understand the impact of compounding returns over the long term.

But to give you context and an understanding of that impact, let’s say, for instance, an individual has a plan when they save for 40 years, and that plan replaces 60% of their final salary. If they shorten that period down, and only save for 25 years, contributing the same amount of money, investing it the same way, they are only going to replace about 30% of their final salary. So you can see what a massive impact those first 15 years have. Alternatively, if they are looking to save for only 25 years, they’re going to have to save double what they would have over 40 years, which would certainly have an impact on lifestyles that one may or may not have been accustomed to.

NOMPU SIZELA: That’s right. Now, given the negative impact of the pandemic, what feedback or anecdotal evidence do you have around people having to tap into their pension savings prematurely in order to survive? That is a very tricky place to be, because natural human instinct is to think about one’s immediate needs as opposed to one’s long-term needs.

CHRIS EDDY: Certainly. I don’t think the full effect of having to tap into pensions would have been covered within the survey, because the questions were posed to South Africans. We might see a little bit more of that in next year’s edition as the impacts of the lockdown and Covid-19 really are felt by South Africans. But I think you raised a very good point in terms of when you are faced with a tricky situation and you potentially have this pension pot available, and you can see that maybe you can access it and get this lump sum of cash right now, that really is very, very attractive to most people. I think that’s because retirement is often not a tangible thing –  thinking about 30 years or 20 years away.

It’s quite difficult to really understand what impact cashing in one’s pension today will have. And that does talk to not being engaged in the process, not knowing whether you’re on track, and not knowing what the decisions you take today will have on your final outcome.

Speaking to that, as well, I think we are rather fortunate to live in the era that we do in terms of technological advances. There are a lot of tools available to individuals today, sort of retirement calculators, where you can put in where you currently are, how long you expect to work for, and  what you’re saving. You can very quickly find out whether you’re on track, whether you’re above that run rate or below, and you can sort of pivot to increase your probability of reaching your retirement goal. But I just think that many people, for one, aren’t interested, or they potentially find the topic too complicated.

It really does boil down to optimising, let’s say, between  three variables: how much you are saving, in what sort of vehicle you are saving – that is, what type of asset allocation, are you saving in tax, or are you saving in shares – and what fees you are paying. And by optimising those three variables, one can very quickly see whether they will be on track or not to meet their retirement goals.

So the outcome and the outlook from this report really is quite concerning, and we just hope that it can stimulate some debate and open people’s eyes to the problem that that certainly is facing a lot of South Africans. Unfortunately, we don’t live in a country where the state can provide significantly for people in their retirement from the state pension perspective, so one  really does have to provide for yourself.

NOMPU SIZELA: Just touching on something that you said, how do we get the psychology around retirement right? And, when that does actually happen for those with the means, what’s the best way to proceed in saving optimally for their future especially now, when market headlines are always so negative? Where should people be investing? We know that the mantra is diversification and so on, but people listening will want to know, fine, I need to save, but how do I do it?

CHRIS EDDY: I think, first and foremost, saving for retirement needs to be made a lot more simple. I think where there’s lots of complexity it puts a lot of people off even engaging with the subject, to start with. So we need, as an industry to distil it down to the three or four things that you need to do to meet your retirement goal. And, as I mentioned before, you can distil that down to kind of the right asset allocation, how much you’re saving, and what fees you’re paying and, based on those decisions, whether or not the path that you’re on is probably going to get you to your retirement-savings goal or not.

But really it’s about simplifying the process, distilling it down to the key drivers and the key variables, and then saying, well, if you just focus on these three variables and you optimise them, you should have a certain level of comfort that you’re giving yourself the best probability of reaching your goal. And that’s really what it’s about – giving yourself the best opportunity.

NOMPU SIZELA: But of course you guys at 10X have a certain philosophy. You have that philosophy around passive investment, as opposed to active management of people’s funds, arguing that you’re supposed to invest over the long term; and then you’re going to save quite a lot in terms of management fees,

CHRIS EDDY: Certainly. And the data really backs it up. It’s not necessarily what we say. If you go and look at any of the research, if you go onto Google, all of the research and the data – not emotional marketing, but the data – shows that a passive investment strategy gives a much higher probability of investors meeting their goal. And partly that is due to the lower fees that are associated, because the lower fees that you have means there’s more money invested in your pot.

And that leads us on to, I think, one of the other scary findings of the survey. Respondents were actually asked if they had some sort of idea of the fees paid in their retirement products, and 49% responded that they just didn’t have any clue whatsoever.

NOMPU SIZIBA: Wow.

CHRIS EDDY: And 11% said that there is no fee.

So you are kind of looking at about 60% of people who have no clue what they’re actually paying for their retirement savings. And, again, that just talks to the lack of engagement. Really, if one doesn’t take control of your own destiny, at the end of the day you’re leaving a lot up to chance.

NOMPU SIZELA: But, to be fair, Chris, I suppose most people that do have retirement funds are those who are employed and get their retirement fund through their employer. And of course the employer will have negotiated with the service provider all the terms and conditions. So, even if they are in tune with what’s happening, they wouldn’t have much control in terms of fees and all of that because they’re part of a group that’s invested in a certain fund.

CHRIS EDDY: Correct. But, at the same time, that talks to whether, at the end of the day, that is really a benefit to being an employer for a company– that they are hopefully providing a good retirement solution for employees. So, on the one hand, we are talking about the engagement of the individual in the retirement-planning process to understand where they are. But, equally so, corporates really need to be kicking the tyres around their corporate retirement savings plans to understand whether they’re getting the best value for their employees, and better value for their employees leads to a better value proposition, as well, across the board

NOMPU SIZELA: That was Chris Eddy, the head of investments at 10X.

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