Take the tough retirement decisions, now

One of the most significant trends across the globe is the continuing increase in human longevity, largely due to ongoing improvements in nutrition, public health and medical technology. For working South Africans saving for their retirement, the impact can be dramatic – the fact that we are living longer than our predecessors means we need far more money for a much longer period of retirement.  This was according to some of the ‘big picture’ issues identified in the initial findings of the 2016 Sanlam BENCHMARK Survey, by Mayuri Reddy, Market Strategist and Viresh Maharaj, Chief Marketing Actuary at Sanlam Employee Benefits.

South Africa’s retirement savers are often unable to take the tough decisions necessary to improve their retirement outcomes, however – the challenges they face include a shortage of information with regards to their retirement funding, a lack of understanding of the limited information that they do have, and an inability to foresee the implications of the decisions they do make.

This year, the Sanlam Benchmark Survey survey polled hundreds of pensioners, trustees and employers participating in umbrella funds. This year’s surveying process also included qualitative studies of retirement fund members and financial advisors.

People are living for longer
“The increase in longevity is perhaps the biggest threat to active retirement fund members,” says Viresh Maharaj, chief marketing actuary at Sanlam Employee Benefits. Maharaj notes that the assumptions historically used to plan for retirement are no longer applicable. “Stipulating 65 years as the retirement age, and decreeing 12-times annual salary as the ‘right’ amount of capital cannot remain relevant in a world where savers will live deep into their 90s,” he says.

Knowing the value of your retirement investment
Among the alarming findings from the 2016 survey is that one in five retirees only find out about the value of their accumulated savings upon retirement, and on average the retiree found out three years before retirement. This is far too late to make any meaningful intervention within the limitations of current retirement thinking.

Know your group scheme benefits
“The focus groups also revealed that retirement fund members were largely unaware of benefits they had through their employer – aside from medical aid benefits,” says Mayuri Reddy, market strategist at Sanlam Employee Benefits Investments. When prompted, many respondents then remembered they had death and disability cover through their employer, but had little idea of the extent or value of the cover. Reddy notes that employees are also unaware of the possibility to convert group scheme benefits, such as life assurance, into individual benefits at retirement. This could be beneficial to retirees as typically no medical underwriting would be needed at the point of conversion, provided the benefit falls below a certain limit.

Where younger retirement fund members are concerned the survey reveals a growing tendency among savers to investigate financial solutions online and only engage with a financial adviser once they have identified the product that they wanted. “In transacting for a single product they miss out on the real value that a financial adviser can add by way of a holistic financial plan,” says Maharaj.

The blame for poor retirement outcomes is often directed at employers’ HR departments or financial advisers when the reality is that employees – retirement savers – do not take enough interest in their personal financial situations. “It is a mix of individuals not taking ownership of their savings, HR departments not being equipped to deliver appropriate advice and advisers potentially not allowing for employee benefits when providing advice,” says Maharaj.

Only 69% of retirees had received advice about retirement, and on average this was first received 9 years before their retirement date. The survey results show that a range of critical advice components were not remembered by savers.

Do a financial needs analysis
“What stuck out for me is that of those who received advice, only 35% can remember going through a financial needs analysis – either this crucial part of the process is not taking place or the manner in which it is being done is not having a lasting impact,” he says.

Fund member apathy continues into retirement. Retirees have a limited understanding of what they have done with their retirement capital at the point of retirement – while ASISA statistics show us that the majority of annuities purchased in the industry are investment-linked living annuities, only 5% of pensioners surveyed said they had this type of annuity / pension. Not understanding what annuity format was purchased puts a pensioner at risk as investment-linked living annuities do not offer any protection against a retiree outliving their capital.

Make informed decisions
“A few simple decisions can have a big impact in terms of how well a retirement fund member can retire,” Reddy says. Likewise, an incorrect decision on contribution rates, investment portfolios, withdrawal of capital when exiting a fund due to retrenchment or resignation, or type of annuity can have dire consequences.

More than two thirds of pensioners admitted to taking their cash benefits upon withdrawal from a retirement fund with many of these individuals doing so without understanding either the tax impact (63%) or impact on their eventual retirement outcome (61%). It is also worrying that more than half of pensioners surveyed depleted the one third of capital that they had access to as a lump sum upon retirement, and this amount had been depleted on average within 2.6 years after retirement.

Maharaj says that awareness is key and that most members of retirement funds are simply disengaged from their retirement funding journeys. As such, he has provided the seven questions that employees need to ask of their bosses or HR departments:

• How can I access information on my fund value? What is my projected net replacement ratio?
• What insurance cover do I have as an employee? For what and how much?
• When last did my fund shop around for the best deal to help me get to a better retirement outcome? Am I paying a fair price for my fund?
• How can I get help to make better retirement funding decisions?

The answers will help generate the awareness necessary to position members for journeys that lead to better outcomes.

Among the positive aspects in the 2016 survey report is a gradual improvement in savings rates. “We have a genuine belief that the annual Sanlam BENCHMARK Survey will help to move South Africans and South Africa forward. If we build a nation of savers we can take concrete steps towards saving our nation,” Maharaj concludes.

Sanlam Life Insurance Limited is a licensed Financial Service provider.