A massive drive by employers and retirement funds to educate retirement fund members is starting to pay off in the improved financial stability of pensioners, but there are still major problems, such as members saving too little and not preserving their retirement savings.
This emerges from the latest annual Sanlam Employee Benefits Benchmark Survey of retirement funds, which studies the behaviour of 80 percent of the 15 million employed people in South Africa who are members of employer-sponsored retirement funds and of pensioners who were members of these funds. The survey, released this week, states that the improved financial health of the retirement market shows that the “hard work” done by trustees and employers to increase awareness of retirement issues “has started to pay off”.
For example, the percentage of pensioners failing to make ends meet dropped from 59.2 percent last year to 44.8 percent this year, while the percentage of pensioners actually saving money every month went from 17.6 percent to 20.6 percent, and saving occasionally from 24 percent to 32.9 percent.
Importantly, pensioners who cancelled their medical scheme membership in the past year dropped from 11.5 percent to eight percent, and the percentage who believe they have saved enough for retirement jumped from 31.6 percent to 42.5 percent.
However, in the survey report Sanlam warns that there are still many danger signs that the industry needs to be aware of and address.
Sanlam sees part of the solution being the greater involvement of employers in the financial affairs of their employees. It says it is in employers’ own interests to contribute to the financial wellness of their employees, as financial stress reduces productivity and increases absenteeism.
Kobus Hanekom, the head of strategy governance and compliance at Simeka Consultants & Actuaries, says in the survey report that, in the absence of financial discipline being taught in schools and given the current strong consumer culture, employers should offer their employees guidance and support.
For example, employees should be encouraged to have an emergency fund or savings apart from their retirement savings that they can access in the event of a life crisis.
“Employers can make a very significant difference to the futures of the South Africans they employ, the survey says.
According to the survey, the financial advice members currently receive from employers is usually limited to an induction process on the first day of employment, when new employees are given information about the company, including its provision for retirement.
The survey shows, however, that 36 percent of fund members have no recall of being informed about retirement benefits. And more than 70 percent of members do not revisit the decisions they made about their retirement fund when they were first employed.
Only 31 percent of funds provide members with regular information showing what they can expect to receive as a pension at retirement expressed as a percentage of their final pay (replacement ratio). And only 66 percent of the members of funds that do provide the information know their replacement ratio.
Mayuri Reddy, Sanlam’s marketing strategist, says that there seems to be a “disconnect between what employers believe is being communicated to members and what is actually retained by members”.
Other key findings of the Sanlam Benchmark Survey are as follows:
* The lack of ongoing education of fund members contributes to a low understanding of the need to preserve retirement savings, with a “profound effect on outcomes”.
Only one in 10 employers provide specific communication on the need for members to preserve their retirement savings before retirement.
And new employers do little to encourage members to transfer their accumulated savings from a previous employer to the new employer’s fund tax free.
Only one in four employers have forms and procedures in place to encourage members to transfer their savings to a new fund.
Reddy says this lack of guidance on preservation is surprising given that “70 percent of trustees believe that the lack of preservation is the biggest mistake a member can make”.
* Almost 60 percent of retirement fund members who withdrew benefits over the past year after resigning or being retrenched took their full benefit in cash. The bulk of the money withdrawn was used to reduce short-term debt and fund living expenses.
Karin Muller, the head of Sanlam Growth markets, says the survey responses show that retirement fund members make financial decisions that have a significant impact on their retirement situation without properly understanding the implications.
* Most members who do not preserve retirement savings only realise the full impact after retirement. Of the pensioners surveyed, about 25 percent had withdrawn money from their retirement savings on retrenchment or resignation from a job before retirement. The survey reflects that:
- 63 percent of the pensioners who withdrew their savings did not realise the punitive level of tax they would have to pay on the cash withdrawal.
At retirement, you get the first R500 000 of your lump sum tax-free. The rest of your lump sum is taxed on a tiered basis, to a maximum of 36 percent. If you withdraw your savings before retirement, only the first R25 000 is tax free.
- 61 percent of the pensioners who withdrew their savings did not realise the negative effect the withdrawal would have on their income in retirement.
- 54 percent of the pensioners who withdrew their savings regretted the decision.
* Against this, the survey found that retirement fund members between the ages of 23 and 35, particularly singles and childless couples, were easy spenders who believed that “spending on me” is a reward for hard work. Securing their financial future was not a big priority.
* The average retirement age of pensioners remains 60 years, with affluent pensioners, who receive a pension of more than R25 000 a month, retiring earlier at an average age of 58. But the survey also reveals that affluent pensioners start saving earlier, at an average age of 23.6 years, while the broader body of pensioners start saving for retirement later: their average starting age is 26.9 years.
Employers indicated they have little intention of pushing out retirement ages despite increasing longevity and the need for pension savings to last longer.
YOU MAY WANT TO RETIRE EARLY, BUT CAN YOU?
Only 7.7 percent of retirement fund members intend to work past the age of 55, despite the fact that improved longevity means they will be pensioners for longer, on average, than their parents and will require more money to fund their retirement.
According to the 2015 Sanlam Benchmark Survey on retirement funds, most people retire at the age of 60, and almost half of pensioners who were members of the retirement funds surveyed are struggling to make ends meet.
A large percentage of retirement fund members who are currently employed (42.3 percent) have targeted a retirement age of between 55 and 59 years of age. Slightly more than 38 percent foresee retiring between the ages of 60 and 64, while 11.5 percent want to retire by age 54.
Only 6.9 percent of those surveyed want to retire beyond their normal retirement date, while less than one percent plan to keep working as long as possible or not retire before age 70.
Asked how they planned to deal with the additional costs of longevity, 41 percent of the current fund members surveyed said they have no plans to continue working after retirement, and they have no choice about their retirement date.
However, 20.7 percent plan to continue working part-time after retirement, another 5.9 percent plan to work as consultants, while 0.3 percent intend to start a business.
Less than 70 percent of retirement fund members have an idea what percentage of their final income they will receive as a pension, with 34.8 percent expecting to receive more than 75 percent of their final salary.
More than half of retirement fund members have absolutely no savings apart from their retirement funds.
However, only 12.3 percent consider their debt situation to be out of control, with 28.7 percent saying that they would consider using part or all of their retirement savings to get rid of debt.
Almost 10 percent of members said they would not belong or contribute to a retirement fund if they had a choice.
About 20 percent of members have withdrawn money from retirement funds, with almost 60 percent of them taking all their retirement savings in cash and 17.3 percent taking a part in cash. More than 40 percent had no idea of what impact the non-preservation of their retirement savings would have on their retirement benefits.
Of those who took a partial or full cash lump sum on withdrawal from a retirement fund, 50.7 percent paid off short-term debt such as credit cards and vehicle finance, 16 percent paid off home-loan debt, 28 percent used the money to make home improvements, 20 percent spent the money on the education of children, and 33.3 percent used the money to pay for living expenses.
Of those who are already in retirement, the survey reflects that 44.8 percent of pensioners cannot make ends meet, with 15.9 percent working to supplement their income, 73.5 percent having to cut back on non-essential expenses, 22.1 percent digging into other savings, 16.8 percent depending on friends and relatives for financial support, and eight percent cancelling their private medical scheme to rely on the state for healthcare.
WOMEN’S NEEDS IGNORED
Women are at a significant disadvantage to men when it comes to retirement planning. Yet very few women consider these disadvantages, the 2015 Sanlam Benchmark Survey of retirement funds has found. It shows that:
* Only 34 percent of female retirement fund members take into account that they need to save more because they live longer, on average, than men.
* Only 11 percent take into account that they are likely to save less because of maternity breaks, which may be compounded by the non-preservation of savings.
* Only 10 percent take into account the effects of divorce or a spouse dying before them.
* Only 15 percent take account of the employment gender gap: the fact that men, on average, earn 35 percent more than they do in South Africa.
This lack of attention by women to their retirement needs is compounded by the fact that only one in 100 retirement funds surveyed tailored their communication for women by highlighting these issues.