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The holes in employer pension funds

Many see the benefit as a detraction from their pay rather than a personal-wealth gain – and for good reason.

One of the most quoted statistics in the local pension fund industry is that only 6% of South Africans can afford to retire comfortably. Despite how dramatic an indictment that is of the industry’s ability to deliver, it is usually used as a stick with which to beat savers.

We are told that people don’t save enough, don’t preserve their pension money when changing jobs, and don’t make informed choices with their investments. That’s why they see such poor outcomes.

This may all be true, but the industry also seems to be avoiding accepting its complicity in the problem.

If outcomes are this bad, it must also be true that the solutions being provided are not good enough.

The reason people are not saving enough, and not preserving their savings, is because they are not getting what they need out of them.

Starting at the beginning

“A pension fund is part of what you give to employees as a benefit,” says Anne Cabot-Alletzhauser, head of the Alexander Forbes Research Institute. “But does anybody actually regard it as a benefit?”

In other words, are pension funds in their current form providing solutions that are holistic enough to meet member needs? Particularly in a country like South Africa – where the pressures on savers come not just from a sluggish economy, but their own extended families and communities – this is a question that really needs to be taken seriously.

“People in pension funds aren’t actually saving for retirement,” Cabot-Alletzhauser argues. “They’re saving because it’s compulsory.”

She adds: “When they move jobs, they will take their money out and use it to maintain their day-to-day life. Is that an economically rational decision? It probably is in many circumstances. But it means that trustees are overseeing something that isn’t working at all. It isn’t doing what it’s supposed to be doing.”

What employee benefits are supposed to be doing is assisting people to manage their finances in a way that helps them live a better life.

“Do employee benefits take into consideration the complex nature of our society?” asks Isaac Ramputa, chair of the Batseta Council of Retirement Funds for South Africa. “You have the majority of society that doesn’t fit in the current model as it doesn’t address their needs – affordable housing, paying for their children’s education, a stable job, financial inclusion, a funeral policy for extended families, and health services.”

Out-of-the-box thinking

A pension fund solution that only offers saving for retirement together with life and disability cover is not a solution for all of these requirements. In many ways it is actually counterproductive.

That is because forcing people to save for retirement when their more immediate needs are not being adequately addressed means they are less likely to keep that pension money for its intended purpose. The industry needs to rather provide benefits that people actually want, and will value.

“There is a need for a broader discussion of what model of employee benefits is suitable for South Africa,” says Ramputa.

“Policymakers and regulators need to come up with an out-of-the-box solution.”

For such a solution to be workable, it must also be empowering. It must give members of pension funds some control over deciding what they actually need.

“One size simply does not fit all, and yet that is how we govern our funds,” says Cabot-Alletzhauser. “If we are going to connect with people and make these benefits meaningful, we are going to have to do something dramatic.”

Wider benefits

This is an imperative on two levels: to deliver better solutions for people on an individual level, and to reduce their reliance on the state.

“There is a systemic problem in SA in that we have perpetuated the notion that we are a grants-based economy,” Cabot-Alletzhauser points out. “People are waiting for government to protect them and give them what they need. If we don’t convert this into something where people learn to develop their own level of fiscal responsibility and autonomy, South Africa is going to continue to keep pouring money into a system that doesn’t work.”

Giving people more autonomy over their savings is also a benefit to the economy, since it gives individuals more flexibility and the ability to take risks.

“Saving is what we might call enablement,” says independent actuary and consultant Rob Rusconi. “It allows you do to better in your life. If you have savings, you are in a position to take more risks, and to have adventure in your life because it is there as an enabler.”

How would it work?

Pension funds and employers should be thinking more critically about how they can get to a position where employees see their benefits as a gain, rather a detraction from their pay.

Part of the solution must lie in technology that offers the opportunity for mass customisation – allowing employees to make decisions about what is most important to them.

The bulk of their saving might always have to go into a retirement vehicle, but they could also allocate money to primary healthcare cover, saving for their children’s education, a family funeral policy or a fund for unforeseen emergencies.

These are things that are more likely to be genuinely seen as benefits for the majority of South Africans.

Since they would be accessing them through their employer, they could also be delivered far more cost-effectively than if they had to seek out such products themselves.

What this kind of model creates is more goodwill towards the employer, a more financially stable and therefore more productive workforce, and a more empowered citizenry. And that is critical for the country’s future.

“South Africa is facing a crisis in that the number of people who will be deemed employable in this country is expanding at an incredibly rapid rate,” says Cabot-Alletzhauser.

“If we don’t find a way to stabilise that employable class, to keep them employed and financially stable, we will have another Arab Spring. We need to use compulsory savings in a way that does more than just provide for retirement. We need to create a stable middle class in South Africa.”

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COMMENTS   29

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What about the simple “rip off” factor. Being forced to save for retirement in a fund selected by “trustees” of a company…over which you a the owner of the money have no say. Then you retire, and if lucky the funds are not wiped out by mismanagement, theft, collapse of country etc, once again with you the contributer having no say. Finally you die and they take half the monthly payment away from your spouse, whether you die at 65 or 90….half is gone. When she dies, the fund retains the balance. And then the industry acts surprised when people don’t want to save and don’t trust them with their funds. Come on man, get serious.

For the more sophisticated employees, those who don’t really care about lavish funerals, add to this concerns about Regulation 28 and the threats of the regime to plunder your pension, and it is an even less attractive forced removal of your money from your bank account.

At last!

Somebody talking sense on the pension industry. Trying to retire through the industry is like trying to matriculate from a school where the failure rate is 94%.

Why on earth would you go there?

Preserving your pension on switching jobs is a pipe dream if you lack the wherewithal to make it to the end of the month.

Lastly, the notion that you can save enough for retirement is a flawed concept from outset. Do the math.

10% of your salary over 35 years equals less than 3,5 years of your closing salary if your investment returns equal inflation. So you’ll run out of cash in about 2 years if you want to maintain your standard of living.

Eish. That’s why 94% don’t make it.

Has somebody run the math of what the savings would look like if a portion of pension fund deduction could be directed to payment into workers’ mortgage? Must obviously not be accessible by member.

Given the compound interest impact, the certainty of the return of say inflation plus 4% and the impact of getting debt-free in retirement, might be an interesting prescribed asset class. The banks won’t like it though…

Hi Johan Buys. Yes, I am an actuary and I have done this math in the past. Sure, if the economy is booming and inflation is rather high, then it can make sense to be invested in the market while having some debt, especially if you gain some tax benefits. However, if markets are just slugging along or performing average, it is WAY more beneficial for you to pay off the debt first especially when factoring in risk. (A market return is certain, where the return you get by paying off your debt is certain.)

Some form of creative system (that actually works and doesn’t have loopholes) where employees have options to direct their savings to paying off debt or to invest in markets (and the ability to change this allocation as circumstances change), would be quite nice!

Some subtle points people often miss is all the interest that you save by clearing your debt first is not just staggeringly large, but it is also a 100% tax free saving. (Nobody is going to tax you on the millions you implicitly gained by not paying all of that extra interest to a bank. If you rather invest the money in the market (instead of paying it off on debt), yes you get a tax benefit, but you are still taxed to some extent on your gains there. Also, think about requiring insurance as an additional form of unnecessary outgo – if debt is maintained high, there is probably an additional argument for having more insurance. These things can get very expensive as people age.

My biggest (personal) issue with RA/pension products is that I don’t believe active managers actually add value and I don’t want to invest in something where there are restrictions placed on what I can do with my savings.

Pay off your personal home bond first. To pay R1000 of interest to the bank you need to earn between R1220 (18%) and R1820 (45%) before tax (depending on your tax bracket) since it is paid with money after tax. So you actually have to do the calculation using before tax amount to determine the total saving.

Agree with your post but why did you have to open by saying that you’re an actuary?

It doesn’t really add credibility considering that active managers and investment quants are typically actuaries.

I’m not an actuary but I too have done the time value calcs and seen the same.

All relevant points though.

Johan-V:

What I meant is that if Johnny is paying R3500pm pension contribution already, that say R500 of that is actually on his behalf paid into a sunk inaccessible function of his mortgage (as opposed to going to prescribed assets). Make the saver’s bond a prescribed asset class in other words. Would need to have a structure that the banks receive those and reduce the accessible capital.

I think it could work but that the banks would fight against it.

We have to understand that it is a de facto government policy to ensure that people cannot retire on their savings. The Labor Unions, the Communist Party and the ANC forms the tripartite alliance. This unholy trinity shifts purchasing power from retirees to union members. It is the stated government policy “to equalize society” and the level of equilibrium will always be at the lowest common denominator, namely the recipient of the social grant.

The income of retirees does not keep up with inflation, while militant labor unions ensure that the salaries of their members rise with inflation or even beat inflation. The increase in administered prices like municipal rates and taxes and electricity is entirely under government’s control. The ANC uses these costs to extort the assets from savers to redistribute it among their voters.

No fund manager can outperform the strategies of a socialist government.
It is really tough to be a capitalist in a socialist country.

A pension fund is not the only savings vehicle available it is simply one of them. But as the name implies a PENSION Fund is for ones PENSION. Employees should have other savings that are more accessible and available for other unforeseen circumstances.

There is no point considering how the majority of South Africans live when the majority do not work and do not own a pension fund investment. Better to consider the needs of the actual investors.

I find this entire article ridiculous.

How about an article looking at whether the tax benefit of saving via a Pension Fund Scheme outweigh the risks & drawbacks. I personally would not save via a pension fund as prefer to keep my savings in USD, fear prescribed assets and do not want to be forced to buy an annuity on retirement. A Pension Fund provides tax savings but there are considerable costs & risks associated with it.

I suspect that the 6% quoted as South Africans that can retire comfortably might not have saved via a pension fund or annuity to retire in comfort. I would argue that most of them might have had the above but in addition have large discretionary investments to retire on in comfort.

Does the current models used by the pension industry make provision for :

A country where political instability will increase exponentially?

Where the population is supported by grants while it grows much faster than GDP?

Where corruption is so badly out of control that it can never be corrected?

Where growth is impossible as the continues deployment of incompetent cadre’s will incapacitate all SOE’s and government? It is already the case.

I don’t think so. It would be prudent to rather ensure you learn a skill that can ensure an income in addition to your failed pension plan sold to you by an industry that guess what the future holds and when they get it wrong it is your problem.

My understanding is that the 6% is directly related to retirement fund member experience. However, because the 6% is mentioned it does not mean 94% have failed. The 6% refers to those who can retain the same standard of living in retirement which is the idealised goal. Much international research shows that people are very adaptable and can come out a decent living in retirement with less in pension relative to what they were earning just before retiring. The 6% is a ‘scare tactic’ and should be taken with a pinch of salt.

From my experience, trustees do not have the best interest of the beneficiaries at heart.

I say this as a result of the unclaimed benefits saga the FSCA (and the funds who manage them) currently face … Imagine R60 billion being put back into the hands of those pensioners and their dependants (especially the demographics that need it most) . eventually ending up back in the economy.

My two cents, the whole industry needs a change, and quickly

Those figures sound correct.I’ve been saving 35% of my income for the last 35 years and if I retired now and wanted to maintain my standard of living,my money would last 8-10 years.Scary isn’t it!

My employer offers a company pension through Old Mutual and compulsory “advisor”. The “advisor” suspiciously advises me to take the most expensive option…

Fees:
Default fund, old mutual absolute stable: 2.1%
“Advisor” fee: 1%
Platform fee: 0.5% (not sure)
Total Fees: 3.6%

After inflation growth of a balanced portfolio is around 4% historically.

This is why people cannot retire. The pension fund industry is taking all the growth without taking any risk. We are being ripped off.

What this article is absolutely devoid of is the eye watering fees/charges/levies that companies who administer pension funds actually charge the respective pension funds. They are also very poor active managed funds

I concur! I have two RAs, one with 10x and another with Penquin (not going into details). The Penquin RA is doing very badly but in order to merge it with 10x, it must be worth more than 20 000k. I have stopped paying into it due to the extremely poor record, but I need to top it up to move it???

And off course their monthly charges – R100+ per month!! NOT WORTH IT! Buy anything else but this garbage! 10x hasn’t budged in 2 years either – not interested in these RAs anymore

The holes are as follows: 1. Prescribed assets 2. Reg 28

That is all you need to know because it will never be enough anymore to live on

Symantics, but Regulation 28 IS prescribed assets
So 1 – Regulations 28
2 – Stricter Regulation 28

Saving is about deferring consumption. Nothing more, nothing less. Opine as much as you want about current imperatives, the point is you need to put money away from as early as possible to be able to stop working one day. The sooner you start, the earlier you can stop. Not complicated is it? Read the excellent article by Craig Torr on this site and you’ll see what current pensioners regret. None wished they had saved less and spent more on housing and whatever during their early years. As for industry rip-offs, there are enough low cost, transparent alternatives available to ensure you avoid the sharks.

Thanks for the article, I have often wondered about this.

I understand the plan is to force people to save (goodness knows, in this consumer driven society, it is not a bad idea) but it also impedes on the individual’s freedom to decide what they spend their money on, especially if Reg 28 and high fees somewhat limits potential growth.

In a world where property rights were protected (so not really South Africa) and where money spent on education was money well spent (not really South Africa either) it would be a fantastic idea to make all bond payments (housing) and school fees (education) part of the bucket of tax free deductions allowable, as pension deductions currently is.

Then employers can offer their employees a window of between 10% – 20% of “pensionable salary” that can be used for any of the above, including actual investments / pension fund contributions.

Most people would be able to go a lot further with their money then, and perhaps even have savings left every month to save something outside of their pension fund.

It would be far more efficient to simply lower income taxes than to add more regulation.

If the majority whom are fortunate to belong to a pension fund did not belong to one. They wouldn’t just not be able to replace there income they would have nothing.

Do not knock the pension fund industry.

Most people “cant afford” to save. And let me qualify that.

On this thread the majority wont earn the same. Some live on less and others live on more. The individual who lives on more cant afford to save because they wont save and live like the one who lives on less, and that is the fundamental problem globally.

Not only in South Africa!

Let’s look at the assertion that “6% of South Africans can afford to retire comfortably.” I do not know where this slogan came from, most likely, a life insurance / pension sales campaign. Also, if this figure is correct, I feel sure that none of the money of those 6% came from pension savings.

Look at these figures: Before retirement, interest gained is no more than CPI. After retirement, annual increases are less than CPI. Also, there’s the obligatory debt incurred to but a car, even if just to get to work, and also debt incurred to buy a house. The interest rates on these are much higher than CPI.

If these are not paid off smartly and zero debt incurred thereafter, you’re in sh!t-street for the rest of your life. No pension will enable any significant life-long savings to enable one to “retire comfortably.”

Pension is for making money for pension fund managers and for the taxman. What isn’t raided by the employer who also runs a company fund, is raided by the taxman to bail out Eskom, e-toll failures, a host of SOE failures and their management thieving, and then also re-distribution in the for of social grants. Pensions are not beneficial to you and me for retirement.

Look at what’s left in retirement: it’s amazing there’s anything at all. Pension funds have no business implying that the 6% got their retirement funding from contributions to a pension fund. The 6% got their retirement from somewhere other than a pension fund. We can be sure of that.

Many good comments and I was long soured on “pension” funds when I was screwed out of the company’s contribution on two occasions. These businesses wound down and the fund distributed amongst those there at the end who dd very, very well; mostly executives. Pension funds carved themselves a cushy well padded niche enforced by legislation, tax benefits and company policy but take away independence from the savers. I reckon the 6% are executives (nice share options too) or senior members, maybe some older municipal and government funds.

So I took on debt, bought a farm scheming that the rental would be my pension and I could always sell for cash that would more or less keep pace with inflation. Now the situation is that farms are threatened by EWC (the worst) and selling incurs CGT and transfer duty etc. Rental income is ok, so far. But I now think, with hindsight, far, far better to have incurred a loan to buy a mix of first world equities and property. Relative stability, built in protection against the ZAR value loss and you can always bolt there.

Fees in umbrella funds should be lower than what are charged by typical fund managers to individuals.

Within the constraints of regulation 28 the company pension fund is an asset but cannot be relied on to provide a decent pension.

For this you need a mix of discretionary savings and spousal income with a view to reducing the tax bill in retirement.

If the system isn’t doing what it’s supposed to do, scrap it. Why should it be compulsory if it doesn’t work ?

Set the people free. Make all such schemes voluntary. Abolish the tax deduction for retirement contributions. Abolish the taxes that penalise personal savings (CGT, DWT). The only advantage to be gained from employment benefits lies in cost reduction through economies of scale.

Perhaps that takes it to extremes, but the road away from a culture of dependence and financial irresponsibility lies through education and informed personal choices, not through coercion.

I find the comments very interesting and yet sad. So many complaints and always a reason to blame someone for poor performance. I sometimes wonder how many people actually read the business pages of newspapers or digital media or just looking for good investment opportunities eg the weekly Morningstar Unit Trust page in the S/Times. There are many opportunities available to all those people against these Unit Trusts or ETf’s either as a local investment or offshore. These are options available to all. Also important that instead of being negative update your knowledge on any kind of money saving opportunities you can find. If you are on Moneyweb then you have internet which opens the whole international investment universe right to your doorstep. Start by killing your outstanding house debt and car HP/leases. Open a Tax free account and look at offshore opportunities to invest in. You don’t need megabucks to do it if you follow the options mentioned above. If your pension fund is not performing you have to start saving via other opportunities as well.

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