Young people employed in medium to large companies and belonging to a retirement fund were harder hit financially by the pandemic than their middle-aged colleagues, with higher retrenchment rates and higher levels of financial stress, as measured by their credit scores and their default rates on debt.
This is one of the findings of the annual Alexander Forbes Member Insights report, released this week, which surveyed almost a million members across the hundreds of retirement funds Alexander Forbes administers. While its main aim is to monitor how diligently retirement fund members are saving for their retirement, the report revealed numerous other trends among employees, including trends on gender parity in the workplace and on overall financial health.
The survey, which covered the 2020 calendar year, categorised people by age as follows:
- Early Millennials: age 18 - 35
- Late Millennials: age 36 - 45
- Generation Xs: age 46 - 55
- Baby Boomers: age 56 and above.
The average age of members was 40 years and the average personal income was R19 327. The gender split was roughly equal: 49% female members and 51% male members.
Retrenchments during 2020 showed a startling increase as the “annus horribilis” progressed: from 3 128 in the first quarter to 12 173 in the fourth quarter.
Highest retrenchments were among employees aged between 25 and 45 years, at between 14% and 17%. Over a longer period (2019 and 2020) there was a 30% drop-off in membership among employees under 25.
Looking at credit and debt statistics, the Early Millennials scored the worst, with 35% of them posing a medium credit risk and 6% posing a high credit risk, according to the XDS Presage credit rating system. These scores dropped off with age, with only 5% of Baby Boomers posing a medium risk and none posing a high risk.
Another indication of financial stress was the proportion of loans in default. Members with loans in default run the risk of legal action and debt review, the Alexander Forbes report says. “On average, Early Millennials have just over 14% of their loans in default. This is substantially much higher than any of the other generations. The next highest are Late Millennials, at just under 5%. Currently, on average, there are 5% of members under formal debt review; this is almost double the South African population average.”
The average debt-to-income ratio across all members was a staggering 77%, meaning that over three-quarters of the average retirement fund member’s income went into servicing debt. Women appeared to be managing their debt better than men: on average, they had a higher credit rating score (771 against 762), a lower debt-to-income ratio (74% against 80%), and a lower proportion of loans in default (23% against 27%).
Retirement savings statistics
According to the study, working South Africans are projected to retire on only 40% of their final salary, on average. (This percentage of final salary is known as one’s net replacement ratio, or NRR.) Current retirees’ starting pensions were 31% in 2020, an improvement from the previous year’s 28%. This is still a long way off from the industry NRR target of 75%
According to Member Insights, only about 6% of retirement fund members can expect an NRR of above 75%. John Anderson, executive of investments, products and enablement at Alexander Forbes, says these figures can be improved by retirement funding stakeholders, including employers, trustees and advisers, forming more meaningful connections with members.
“The results of Member Insights serve to amplify our collective responsibility to better connect with members via access to information, education, counselling and advice. We have hard evidence of the impact on decisions when such connections are improved and are convinced that this will make a positive impact on people’s lives,” he says.
Government is also making moves to improve retirement outcomes with its proposed “two-bucket” system (see story here).
Covid-19
The implications of Covid-19 on retirement outcomes are evident in the research, which found that:
- About 30% of retirement funds implemented contribution holidays or reduced contributions.
- Many of the funds had since recovered and only 5% of funds still have these relief measures in place.
- Average contribution rates reduced slightly from 14.18% to 14.10%.
- The percentage of members preserving their savings on changing jobs increased from 8.8% to 9.6%, while the portion of assets preserved decreased slightly, from 48.4% to 48.3%.
Anderson noted that the fact that preservation rates didn’t drop during the pandemic indicates that financial hardship is not the main reason that people do not preserve their savings; it is rather a lack of understanding of what it means not to preserve, and this needs to be addressed through education and communication.
PERSONAL FINANCE