Debt is the ‘elephant in the room’

By Danie van Zyl, head of guaranteed investments at Sanlam Employee Benefits

Debt is the ‘elephant in the room’ when it comes to retirement outcomes

Urgent intervention is required to cull the ‘ultimate destroyer of retirement fund benefits’, according to Zyl at the recent Batseta winter conference.

Danie van Zyl recently spoke as part of a panel at the winter conference of Batseta, the Council of Retirement Funds for South Africa. According to van Zyl, debt was the noticeable ‘elephant in the room’ when it came to any discussions about retirement outcomes for fund members. It had become a matter of urgency, he stressed, calling for wide-ranging education initiatives to address ‘the ultimate destroyer of members’ retirement benefits’.

Debt the destroyer
Van Zyl was emphatic that it was “… imperative for employers, unions, fund trustees and lending institutions get involved in conversations with members about how high debt levels destroy the long-term benefits of their retirement savings”.  Quoting a focus group study undertaken by Sanlam, he said attitudes towards debt among respondents revealed a disturbing ‘me focus’, with young people in particular using debt as a form of reward. Spending on credit was typically used to make up a shortfall in income, with all users admitting to holding at least one credit card and multiple store cards to feed this shortfall.

Advice is seen as expensive
To make matters worse, fund members typically find financial advice ‘too expensive’, and few fund members consider long-term investments (outside their compulsory contributions to retirement funds) to be relevant. Younger members are generally wary of investments, such as unit trusts, as they are concerned that they may see the value of their investment decreasing during a market downturn.

Preservation is poor
Other crucial insights were that most people aged between 23 and 35 cashed in their retirement savings when changing jobs, mainly to pay off short-term debt and pay for living expenses, without considering the tax implications. Very few regarded owning a property or servicing a mortgage bond as a priority.

“Although focus group participants were grateful for the enforced savings courtesy of their retirement fund, they were apathetic about everything from the election of trustees to the level of their contributions. Default options were the standard choice,” Van Zyl concluded. 

The way forward: Changing attitudes is critical
Faced with this alarming knowledge, it was essential that all stakeholders – including trustees and HR departments –   become actively involved in the process of changing attitudes towards savings and debt. Van Zyl noted that many fund members admitted their high levels of debt made them depressed and despondent, which affected their performance at work, yet said they could not help their ‘addiction’.

It was further mentioned that much of the problem lay outside official credit providers, in the form of loan sharks who sit outside the factory gates, leading many to use debt to pay debt, creating a vicious cycle.  Not surprisingly, the related stress led to absenteeism and other social problems such as crime and even suicide.  However, it was found that not all debt is credit-related. Employers and trustees had to also take into account that employees could fall into arrears on everything from rates, taxes and utility bills to school fees and child maintenance.

The role of the trustee
The provisions of the Pensions Fund Act required trustees to move beyond the mere administration of their funds. Overseeing the financial health of members was integral to the proper management of their contributions and benefits.

Enos Ngutshane, chairperson of the Prasa Provident fund, also commented that employers were in danger of ‘missing a trick’ if they did not collaborate with fund trustees and lending institutions to involve employees in the conversation about how over-indebtedness could have a devastating effect on their long-term financial prospects.

Sustained behavioural and motivational change would be essential for fund members to achieve their long-term retirement objectives.