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.”
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.”
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.”