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Covid-19 threatens to create a lost generation of retirees

Who may not be able to enjoy their ‘golden years’.
The pandemic has created a dark cloud when it comes to retirement savings. Image: Shutterstock

South Africa’s tough economic climate over several years, coupled with the financial pressure put on households by the Covid-19 pandemic, is threatening to create a lost generation in the country who will not be able to retire because they simply could not save enough during this period.

With the protracted recovery from the pandemic, and the fact that most of those who are saving for retirement find themselves part of the sandwich generation (where they must financially support children as well as ageing parents), is there a focus on survival at the expense of saving for a period that is 30 to 40 years in the future?

The current reality

The 2020 Sanlam Benchmarks Survey, which presents a snapshot of retirement vehicles across the country, paints a worrisome picture when it comes to current saving towards retirement.

It indicates that eight out of every 10 local retirement fund members have experienced a reduction in their annual salary increase and/or their net income.

In addition, some of these people took a forced sabbatical or went through a retrenchment process during the pandemic.

The survey adds that up to 41% of employers who offer umbrella funds offered financial respite to fund members by suspending employees’ retirement savings contributions in 2020.

Read:

Early retirement comes at a huge cost

Early retirement is tempting – but can you afford it?

It notes that both standalone retirement funds and employers in umbrella funds remained committed to meeting their risk cover premiums during the pandemic.

The survey referenced statistics from Statistics SA which point out that:

  • 8% of working South Africans lost their jobs during the pandemic;
  • 26% of employees experienced a reduction in income during lockdown;
  • there was a 10% increase in employees reporting no income during lockdown; and
  • 19% of respondents indicated that the lockdowns will have a major impact on their ability to meet their financial obligations.

There is, however, a glimmer of hope within the pressures the pandemic is exerting on those saving for retirement. The survey points out that millennials are well versed in managing the balancing act of spending money on education and making their children’s needs a priority as well as saving for retirement.

Discretionary spending

With discretionary spending under significant pressure, is there a focus on short-term survival over long-term preservation, especially for an event that most South Africans won’t be able to successfully navigate?

Moneyweb asked Kobus Kleyn, a certified financial planner at Kainos, if the public really is compromising on saving towards retirement.

“With disposal income dwindling [and in some cases, non-existent] retirement saving is an expense that has been shifted to the sidelines for the time being, and possibly for at least three to five years while our economy takes time to recover,” he says.

“It is indeed an unaffordable luxury for those not on company retirement funds with compulsory retirement contributions.”

He adds: “Even with company retirement funds, employees on structured packages and funds are changing to lower percentage contributions and lower pensionable income structures.”

Read: Are umbrella funds changing the retirement industry for the better?

He points out that with the risk of Covid-19, many a financial consumer would rather stay invested in risk protection and maintain premiums or take out more risk protection and drop their retirement contributions, as they feel they may not live long enough to enjoy retirement.

“Somewhere the budget must compromise on something to make ends meet. The objective with the lowest risk and longest-term will always be compromised,” he explains.

Lost generation?

It is becoming clear that we may inadvertently be heading towards the creation of a lost generation of South Africans who simply will not be able to retire comfortably.

“With an extended pandemic that has already lasted over 18 months, there is every indication that surviving the direct impacts of the pandemic will take at least 30 months. This means we will have resolved the health challenge of the pandemic by 2023,” says Kleyn.

“Then we must add the lagging economic and financial hardship impact of another six months beyond herd immunity. There would not be sufficient disposable income to contribute to the nice-to-have retirement plans of those hardest hit by the pandemic.”

He notes that with financial service providers allowing premium holiday periods of up to a year with no contributions, there is an opportunity lost on both contributions and allowable tax deductions.

“We may believe 12 months is not an extended period, but as Albert Einstein stated, compound growth is the eighth wonder of the world, and every year lost does make a difference,” says Kleyn.

“Add to this the concept of rand average costing buy-in on premiums lost with a very volatile market [including a crash of 33 % in March 2020] with a subsequent 72% recovery, there are more losses that will be suffered.” Kleyn adds that because of these losses, many consumers would see contributing to something that is a far distance objective as a luxury.

Surviving the pandemic

Kleyn points out that the public focus is on survival, and with the sandwich generation, it is about providing for their children and parents first, long before planning for their retirement. Covid could not have come at a worse time, exponentially increasing the problem due to loss of employment for children and early enforced retirement for the sandwich generation.

“A significant focus needs to be made on compulsory funding vehicles,” he says. “I believe the way forward is for government to make recommendations around mandatory funds for all companies with employees. I would add the compulsory preservation of funds to the mix to mitigate the enormous fund losses with tax negatives and compound growth losses when the retirement compound growth link is interrupted with resignations and retrenchments.”

Read: Covid-19 has led to increased risk aversion among retirees

He adds that the outlook for compulsory and voluntary savings was already abysmal. However, the pandemic has made it disastrous at best.

“I believe it requires a combined effort between government, private business and the financial services profession to make a concerted effort to reinvigorate the savings culture with innovative ideas, products and regulations to boost retirement savings,” Kleyn says.

The pandemic has created a dark cloud when it comes to retirement savings. However, to avoid the creation of a lost generation of South Africans who cannot retire, innovation will need to be brought into the market. This is something South Africans are known for. There is a glimmer of hope at the end of the tunnel.

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So what, exactly, must a person do who’s been retrenched? Tell himself that he’ll at least be able to pay for food when he’s 65?

Secondly, this article does not mention one of the big problems with retirement savings in SA: the dismal performance of fund management companies and the exorbitant fees they charge for third-rate retirement products.

There are alternatives for retirement savings that cost less.

On performance, fund managers cannot draw blood from a stone, as even the index has been poor over past 10 years and the ZAR has been devalued 2.5x since then. For me the bigger issue is that regulation 28 needs to be scrapped so we can earn returns from functioning economies.

I’m not sure about your stats. Working with calendar year data, for the last 10 years, the nominal annualized return of the average Reg 28 compliant balanced fund was just over 10% which converts to a real return of around 5% per annum. It could be better but it is not the train smash your comment suggests!! Rand depreciation benefits a larger portion of a Reg 28 portfolio than the offshore limits imply i.e. the offshore assets plus the rand hedge component in local equities benefit from rand weakness. While Reg 28 is not perfect it is there for a reason, namely, enforced diversification.

jBlack ….generally sharp on replies …but missed the point that Active Managers are still keeping the cream off investors contributions with their grotesque fees..
Yacht sales are on the up for them. Where retires are battling to stay afloat in their canoes

Leah Buchanan Fund managers, active and passive, do not in any way ‘clip the ticket’ on retirement contributions. Administrators do. Maybe you mean ‘returns’. Some active management fees in the retail space are ‘grotesque’ but in the retirement fund or institutional market if your fees are too high you are in the spotlight and are almost certainly losing clients to lower cost providers, active or passive. Finally, not all passive is cheap, and not all active is expensive.

@colson, true was using July 2011 as the point in time of R6.60 instead of 2012 ZAR July 2012 at R8.10, so my devaluation of the ZAR is a little lower – although it shows how much of a move there is in a year. Sadly it has been too much up and to the right from a devaluation perspective.

Over that 10 year time frame my Satrix 40 has grown at just under 10% per annum. Whilst good in ZAR it is massively eroded by the ZAR weakness. My VT (Vanguard total world) shares have done 18% per annum in ZAR. From a capital growth perspective in local currency they’re close (8% vs 12% per annum), but the ZAR depreciation adds most of that extra outperformance (7% per annum of devaluation).

I don’t blame the SA fund managers for a poor index performance, I just think SA’ns are losing out by having a 70% local exposure requirement is a problem when SA is less than 1% of global economy. SA’ns like other poorly managed economies have limited upside but huge downside if the currency goes to junkyard status.

@Leah – you don’t need to use an active manager if you don’t want to. If you feel the higher fee compensates you with higher returns then go for it. I’m happy to be strategically exposed to equities as a class rather than paying a manager to try pick the right shares.

Also, don’t you know how hard it is to beat the index every year for a decade! If you manage to do that you need to take all your customers funds as the performance fee as you achieved the impossible, lol, just kidding.

Leah Buchanan You haven’t given your comment a ‘Like’ in the last 10 minutes. What’s up?

My fund grew 17% the past year. 26% growth my other stuff. I don’t complain.

Well i know of a generation that is not under threat, in fact Covid has transformed many of them into instant millionaires.. Catapulting them into a new lifestyle unlike anything else they’ve ever known.,Does digital vibes ring a bell?

The same people who have stolen in excess of perhaps the equivalent of two GDP’’s, yes Trillions, making WMC (the supposed threat) look like parking money

The upside of all the theft is they love to spend, creating an enormous flow of money back into the economy..Sadly though, sometimes to the wrong channels..

The downside is they squander the loot and care not for the day of tomorrow, as saving is not part of their DNA like sipping on a 25 year old whiskey in designer wear, donning a R250 000 time piece and driving a R2 million SUV , hence, when they run short, nepotism, cadre deployment and grand scale theft continues unabated at the expense of the poor, the tax payer, the country and of course service delivery.. And the sick cycle starts again, with a lame leader and Government looking on, only to tax to death the handful of honest tax payers who subsidized the event

They have an insatiable appetite for grandeur and more..Their appetite can be compared to Mr Mercedes who helped loot a store in KZN..This man epitomizes what we were not taught at school! When is enough enough?

Long live capitalism, well according to the elite anyway

Get a job. That is what you guys have been saying to the unemployed for decades.

Rubbish. You do not accumulate your retirement benefit over the last 2 years of employment only.

True, the last few years are important, but what is “in the pot” will grow exponentially.

Its all very well making the investor sound like an idiot, keep telling them they havent saved enough. That may be the case but we arent exactly in an investor friendly environment. We have a corrupt criminal governemnt passing all sorts of laws – non of which actually benefit anyone other than themselves. To be honest if I were able to id withdraw ALL my pension money and send it off shore away from the thieves. Try telling the Zimbabweans that ‘staying invested’ for the long term is the best way to go when their lifes pension couldnt even buy them a naartjie come end of the month wheras ten years previously could have bought two houses.

Oh please.The sole cause of our economic decline is the insanely stupid Africa policies of the looting ANC and friends.

Covid did not bring the economy to a standstill, that was done by the ANC which was led by the nose into doing things like a state of disaster before it never happened and a state of fear that everyone was going to die and then a state of no vaccines to save everyone and then a state of confusion about what is the truth about most everything to do with the Covid new flu and then a state of hidden adverse reaction data whilst herding everyone for injection regardless of their informed consent or suitability for it and then the manufactured state of hate for basic human rights causing yet another reason for people to become polarized and

Just think of all the lives the lockdowns saved…and aren’t we so grateful to our government to be broke, jobless, but alive.

Maybe we’ll get the 350 a month handout

There you go

It is the ANC, not just Covid-19, that is creating a lost generation of retirees.

Interesting Article particularly when Tito and his Treasury mates , vigorously supported by the unions , want to allow early withdrawal of Pension money to HELP those Struggling Cadres!!!
They simply dont have a clue !!!
Just puts them onto more State subsidies down the line for whomever replaces the ANC to sort out !!

nice photo of the golden eggs — but without the goose?

is goose in a witness-protection-program?,
or already slaughtered by sars?

The Goose Emigrated !!!

…with one remaining “tax” feather cover on its “Cloaca”

Good points Kobus, for a much relevant article (and it’s spelt Kleyn….not Klein. Take note J. Faurie!)

Proud to see my fin planning associate is active on MoneyWeb!

Tax regards,
Michael Storm

First one should consider that on an excess mortality basis (SAMRC figures) about 1 in 30 people over 60 in SA may have died from COVID by the end of wave 3. As a result, life expectancy seems to be down to below 60.
One result of that may be higher life annuity rates for a while – assuming life offices pass some of those through. Right now they are just booking excess profits on their life annuity books due to all the early deaths.
For those in defined benefit funds with large numbers of pensioners the solvency of those has probably increased dramatically.

Whazza problem?? ANC successfully created 3 lost generations — 4th in the making !!!

South africa created their own debt trap which their children,children,children,children are going to pay for.
Cant blame anyone but yourselves.
So many examples such as SAA,ESKOM,BOSASSA,KEBBLE,GYPTHAS,CAJEES,cash and carry health department,….etc

Yes, times here are difficult but one has to take (intelligent) risk in order to get returns. And this country is risky with a lame leader, a corrupted self-serving guavamunt, etc. As South Africans we tend to be very pessimistic about ourselves and I understand it (and participate in it as well). Look at the basics – the very first Rand you put away in your youth is the Rand that worked the hardest in your retirement fund. It is, frankly, too little too late to think that you are going to give your retirement nest egg a major boost in the last 5 years of your career – time is not on your side anymore in this scenario. Yes, currently most of us take strain with covid and all that, but if you followed the retirement investment basics you should now only be annoyed, not be very worried from a financial perspective.

End of comments.

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