Live longer, work longer?

Top among the emerging trends as the “new normal” for retirement savings is improved longevity, according to the 2016 Sanlam BENCHMARK survey. Longevity combined with poor savings outcomes will force fund members either to delay their retirement or continue working after their planned retirement date.

Retirement funds will in future have to cater for those who continue working until they are 70 or 80 years of age, for those who have fewer “pay cheques” to work with and for those who prefer a flexible contribution rate.

Elias Masilela, Executive Chairman: DNA Economics and National Planning Committee Commissioner announced as part of the survey results that South African university graduates only had 18 years of active contribution to the economy – as it would take three to five years for them to find gainful employment. Structural issues such as tough economic times, low employment levels and low savings levels add to the complexity. Against this backdrop the traditional ‘save 15% of gross salary for 40 years’ retirement methodology is proving difficult to achieve.

Dawie de Villiers, CEO at Sanlam Employee Benefits says that another big factor impacting on the industry is regulation.

“Recent regulation, which aimed to improve preservation and force annuitisation, has not necessarily had the intended outcome. Regulation that was meant to improve financial retirement outcomes for members has conversely resulted in many members contemplating resigning from their employers to gain access to their retirement benefits – with dire consequences for their retirement savings.”

There are also growing concerns about the long term consequences of Regulation 28, which caps the percentage of a fund member’s accumulated capital that can be invested in different assets classes.

“Per the 2016 BENCHMARK survey, 42% of employers describe Regulation 28 as unnecessarily restrictive, up from 15% in the previous year. Employers went on to state that it restricts funds from making the right investment choices at the right time. The need for Regulation 28 to be reconsidered has been intensified by findings that the average university graduate only has 18 active years of gainful employment. Given that the current workforce has a limited period in which to save towards their retirement, they would benefit from a higher risk portfolio to produce maximum retirement outcomes,” said De Villiers.

De Villiers’ concern over the regulation is further evoked by data from the 2015 Large Manager Watch which shows an average equity holding in retirement funds of between 55% and 65% despite the latest comprehensive research indicating that South African retirement fund members can safely invest 100% of their capital in this asset class. The optimal weighting in offshore equities is in the region of 30% to 40%.

There are a number of areas where the retirement fund industry could make “quick” gains to improve retirement funding outcomes. One of these would be a review of Regulation 28. De Villiers welcomed the regulator’s transparent and consultative approach, but encouraged them to focus on “tweaks” to the current regime in order to drive down costs and assist the industry in constructing appropriate portfolios. He adds: “The review of Regulation 28 is critical   given the expected global economic downturn and its effect on the future performance of retirement investment portfolios.”

A second “win” would thus be for the industry to apply “best practice” in matching fund strategies to minimum income targets. At present the BENCHMARK Survey reveals a major disconnect between targeted incomes at retirement and the ability of default options to achieve these, with just over half of funds believing that they will “hit” their default targets over the long term.

Another easy “win” would be to encourage members to seek financial advice in order to begin planning for retirement at an earlier stage with the involvement of fund administrators and fund trustees post-retirement.

“Whatever we do and whatever new initiatives we embark upon, the most important thing is to ensure better outcomes for the fund member – and that is what Sanlam and other industry stakeholders are hard at work to ensure,” said De Villiers.

And it doesn’t get better. “The ongoing ‘digital evolution’ has the potential to radically change the way in which retirement funds communicate with their members. Sanlam’s latest research singles out technology as both a disruptor to retirement funding practices and an enabler for product suppliers to better meet fund members’ needs,” says de Villiers.

He says employers, fund administrators and fund trustees have to make significant changes to accommodate customer needs including shifts in life stages and the attitude towards retirement saving exhibited by younger employees in the digital age.

“The Sanlam Umbrella Fund is an example of a fund really embracing digital communications. It has this year launched an interactive website ‘Retire-mate’ and ‘My Retirement Fund Member App’ to give members greater access to retirement savings information and educational content.”

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