JOHANNESBURG – A high level of indebtedness prevents many South Africans from saving for retirement, a financial planner says.
Speaking at a retirement round table hosted by the CFA Society South Africa, Wouter Fourie, CFP® and the Financial Planning Institute of Southern Africa’s (FPI) Financial Planner of 2015/16, said the reality is that debt is one of South Africa’s biggest problems.
A recent World Bank report called South Africans the biggest borrowers in the world. Eighty-six percent of South Africans borrowed money last year, he said.
“Now we ask ourselves why don’t we have money? Why don’t we save money towards retirement? Because we don’t have money. We’re so in debt at the moment and servicing the debt levels that we’re not able to save.”
Only about 6% of South Africans can maintain their standards of living in retirement, he said.
One of the reasons South Africans don’t save is the culture of no planning. Professional planners have a significant role to play to foster a relationship of trust with consumers and to convince individuals that it is important to have a financial plan.
“Without a target how would you know when you miss the target? You will never know and it is exactly the same with a decent financial plan.”
While some South Africans don’t save for retirement at all, many aren’t saving enough and aren’t preserving their retirement benefits. People are changing jobs more frequently than in the past and have an opportunity to access their retirement savings every time they resign.
Inadequate exposure to growth assets is also cause for concern.
Many investors move their pension fund investments to money market (cash) investments in the years before retirement because they are considered “safe” investments, Fourie said.
Moreover, many South Africans are supporting children and parents, often to the detriment of their own retirement planning.
The significant levels of unemployment also mean a lot of consumers are struggling to survive and aren’t in a position to accumulate a nest egg.
Fixing the problem
The first step towards financial independence in retirement is budgeting and understanding that you shouldn’t spend more than you earn, Fourie said.
It is also important to educate people to draw up a proper budget.
Another step is to gradually enforce retirement savings.
Fourie said it would be very difficult to compel employees to save 15% of their salaries towards retirement, but government could consider gradually introducing mandatory retirement savings with increases of for example 1 percentage point each year in order to reach a 15% contribution rate over time.
Education around retirement savings should already be introduced at school level, he said.
In order to change the landscape South Africa also has to foster and incentivise entrepreneurship. Overregulation has to be addressed to make it easier for enterprises to do business and create jobs, he said.
National Treasury has embarked on a significant regulatory reform process to encourage household savings and improve the financial situation of especially vulnerable individuals.
Some of the current reform proposals include default options that would benefit retirement members in the long run in cases where they failed to exercise specific options (for example choices around investment or preservation).
Philip Bradford, president of CFA SA, said initially the reforms wouldn’t have much impact on South Africans who are drowning in debt.
However, the only way to improve the situation was to start paying off loans, as this was effectively the first form of saving.
Bradford said for many people who aren’t investors the debt incurred to buy a house was a positive step as it entrenched a compulsory form of saving.
But ultimately, retirement reform won’t be a silver bullet.
Michelle Dubois, legal marketing specialist at Liberty, said it is never too late to start saving for retirement. Even for South Africans in their forties that may only change jobs several years from now, some form of compulsory preservation will make a difference to the pool of funds available when they retire.
“Every month that goes by that you are not able to access those funds you are in a better position immediately,” she said.
National Treasury stressed last month that new regulations wouldn’t deny members access to their retirement funds although they would be encouraged to preserve. If more stringent preservation rules were to be introduced in future, members would still have access to a certain portion of their funds.