PHILADELPHIA – Everyone knows that South Africans don’t save enough for retirement. According to the 2014 Sanlam Benchmark Survey, an annual review of the retirement industry, only 29% of South African retirees who are members of funds are able to maintain their standard of living when they retire; that falls to 10% when all retirement age South Africans are considered. And even that statistic obscures the true nature of South Africa’s retirement landscape.
Consider, for example, the following. According to Statistics South Africa, there are currently 4.15 million South Africans aged over 60 in the country, and according to the Department of Social Development, there are currently 2.96 million people over 60 receiving old age grants. That means that over 70% of South Africa’s retirement age citizens qualify for means-tested social grants – this suggests a widespread lack of savings.
This is worrying, because as the Sanlam survey points out, these days older South Africans have a number of dependents they must care for – spouses, unemployed adult children, and grandchildren – and they live longer. That makes it even more important that retirement planning improves.
Government has recognised this, and has begun to implement some much-needed reforms. Over the next few weeks, I’m going to talk through some of the key issues in retirement reform by grouping them into three broad categories: retiree behaviour, industry issues, and supplemental reforms.
Retiree behaviour: How we sabotage our own retirement and how government is trying to save us from ourselves
Right now, South Africa’s retirement funding system is semi-voluntary. People who work for big companies are usually required to contribute to the company’s retirement fund (be it a provident fund or a pension fund), and their employers also make a contribution. However, according to government, there are about 6 million working South Africans who do not contribute to any fund, either because their company doesn’t require it, or because they are self-employed or work for households. So, one problem is that a lot of people, especially low-income earners, just aren’t saving for retirement at all
Among people who work for big companies, upon retirement, many close out their defined contribution funds and receive a lump sum payment. In the old days of defined benefit funds, workers were guaranteed a monthly amount, usually based on their final salary. But today, you get a lump sum pay-out equal to what you put in, plus what the company put in, plus whatever returns you earned, less fees and taxes.
For most people, this lump sum is much smaller than the amount they need to replace their lost income. And one major reason for this is that far too many South Africans withdraw cash from their retirement accounts before they retire. Specifically, most people work about seven different jobs in their lifetimes, and when they change jobs, 9 out of 10 South Africans choose to empty out their accumulated retirement funds, withdrawing as much cash as they can instead of transferring their savings to their new fund.
A second mistake people make is that, when they are provident fund members (instead of pension fund or retirement annuity fund members) is to take their final pay-out as a lump sum instead of using some of the money to buy an annuity that will provide them with regular income.
Government plans to change all of this, first, by limiting your ability to withdraw money from your fund before you retire and requiring that any retirement savings are transferred to a preservation fund when you change jobs, and second, by requiring you to purchase some kind of income annuity with your provident fund money.
Overall, these are good changes. They encourage good behaviour in savers, and there is still an allowance for withdrawals, and some flexibility in identifying what annuities to purchase. However, these are only good reforms if the retirement fund industry offers good products. There’s no point in transferring your savings to a preservation fund where they will be eroded by high fees and will earn dismal returns. There’s no point buying an annuity that eats your capital up with fees and drawdowns, and runs out ten years into your retirement. So, without proper reform of the industry, these reforms will not truly make retirement better for South Africans.
Therefore, next week, we’ll take a look at the ways in which government is trying to reform the retirement industry to reduce costs and improve the quality of products.