South Africans are not hard wired to save

…so we will never have more leverage to change behaviour and teach new habits than in the first week or two of new employment.

South Africans are not hard wired to save for retirement. This is one of the many aspects highlighted by the 2016 BENCHMARK survey.

When we asked a focus group of retired people what advice they would give to younger people, almost all of them said, “Save / start planning / invest from a younger age”.

When we asked a focus group of young South Africans about their saving habits, they indicated that they tended to react to a particular development in their life and did not follow a clear plan.

Financial advisers know this behaviour only too well. “We do some initial planning in terms of a retirement annuity, but they [our clients] can’t afford to pay whatever they need to pay because there is always something that tends to get more attention, like small children, house, car, the good things in life that they want to buy and benefit from first, and then they look at retirement.  When you look at 55, then all of a sudden they want to contribute more in the last ten years of their life and that is too late. ”

South African also do not seem to have a clear idea of how much money is needed to be able to retire comfortably, and how much they need to save today to be able to achieve that. For many, the planning process is a rocky road with much tension and discomfort. A member described it like this:  “You have one product but they say that’s not enough, you need this and that too. Why not make one that is enough, why split it into all these stupid little things? Oh, you need this little bumper, just that little boost, and you feel like they are just selling stuff to you. And then a year later they phone you and say “you know you can double your premium and still get a saving on this and that.” (JNB, young, lower income)

The Day One fund induction strategy

What we have learned from the research done in the BENCHMARK Survey over the years is this:

We will never have more leverage to change behaviour and teach new habits than in the first week or two of new employment.

If we are able to launch a member on a good retirement plan during this time, the chances are that the member will enjoy a good retirement outcome. Members who elect to contribute the minimum so that they can have more “take home pay” or who take their benefits in a lump sum when they change jobs, never recover fully or at all.

With the Day One fund induction strategy, we break away from the conventional approach in the following ways:

Fresh message by the employer: The employer talks to new recruits in a way and in a language they understand – by way of a short audio visual. It describes and summarises the fundamentals of planning for retirement. It unpacks how much the employer is invested in ensuring a good outcome for their members, not only in the event of retirement but also in the event of death or disability, and how important it is that the employee pays attention and takes individual control of their outcomes.

Member guided and empowered: Instead of saying “talk to your financial advisor”, the employer can say, “run a calculation so that you can familiarise yourself with the likely outcome and what you can do to improve it”. This step is directed at empowering the member – to help the member understand and take control of their basic retirement plan. Every member needs to know what their projected pension is and how much he or she needs to contribute if they wish to optimize the result.

HR guided and empowered: We empower the HR officer to explain the process and counsel the members. When we asked the question “who assisted you with your retirement plan in the 2016 benchmark?”, just under half said they relied on the employer / HR. The HR officer is at the right place at the right time. They are generally willing to assist but tend to lack the training and the support to be able to provide assistance. With the Day One fund induction strategy, the HR officer is empowered and enabled to explain the process and support members, as was envisioned in the draft default regulations.

Robo advice: The robo advice approach is generally very well received. Partly because it offers just enough information at the right time. It also avoids some of the stresses and strains of a sales situation. A key differentiator, of course, is that it provides vital context and training for every member.  “It’s motivating you to do more, hey. ……It’s rewarding as well to see that you are making a difference in your own life.” (JNB, young, lower income)

Serving the needs of all the members: One of the special research areas of BENCHMARK shows that those members who enjoy financial advice are much better prepared for retirement. We have to accept, however, that a large percentage of members will not enjoy advice from a personal financial planner as it may not be practical or cost effective going forward. This is primarily because, as has happened in the United Kingdom, new legislation places this service out of the reach of members in the lower income groups. As it is, research showed that few members in the lower income groups are prepared to pay for financial advice. We must therefore make sure that the fund benefit structure and the member guidance and support structures are able to guide and support these members to good retirement outcomes.

Financial literacy training

Our strategies continue to be shaped by the views and ideas of the newer generations. “I think they should do more foundation phase educational programmes in schools. Go in, make it fun, kids will come home and talk to their parents: “Oh, I learned this today” and they will say: “Oh, I’ve got this” and you interact with your kids as a family unit. (JNB, young, lower income).

Educating South Africans on financial literacy is a non-negotiable, the earlier the better. We would like to make a start where we have the most influence. The Sanlam Day One Fund Induction Strategy is inexpensive and easy to implement. Members will never be more ready to focus, pay attention and learn new habits than when they receive their first paycheck. If employers do nothing else this year, implementing this strategy will be a great start and will make a significant difference.

Sanlam Life Assurance Company (Ltd) is a licenced financial services provider.