We need to engage more

By Viresh Maharaj, Sanlam Employee Benefits

Employers who engage with employees create an opportunity to improve retirement outcomes for fund members. What does it involve?

About 80% of employees in the formal sector in South Africa belong to an employer-sponsored retirement fund. As new employees, they usually have to make important decisions about fund investment strategies shortly after their induction on ‘day one’, but according to the recent 2015 Sanlam Benchmark retirement study, 7 out of 10 employees never review these initial decisions regarding their retirement benefit options.

Such a high number of fund trustees not engaging with their retirement savings at all after joining an employer-sponsored retirement fund is a matter of serious concern.

In taking a system’s view of the retirement funding challenge, it is clear that employers – who are the critical link between employees and the fund – need to play a much more engaged role in combating member apathy while influencing better behaviour and ultimately ensuring superior retirement outcomes.

First-day pressure

The entire retirement funding journey – from joining an employer and reviewing investment and insurance options to changing jobs and in the end retirement – needs to be revisited in order to optimise the system to set up employees for success rather than failure.

For instance, new employees are under tremendous pressure to make decisions about their lifetime savings goals and investment strategies at a stressful time in their employment – on the first day.

This practice has negative consequences, since employees typically do not have the financial nous, advice or guidance at this point to make appropriate choices – and 72% do not revisit these decisions.

The effect of poor decisions is exacerbated by the finding that they simply wait too long to materially affect their retirement outcomes positively, with 5 out of every 10 only starting to plan for their retirement within 10 years of retirement.

Crucial decisions are made without proper advice, adequate communication or appropriate guidance, when new employees are on the spot and under pressure. Engaged employerism could therefore make a crucial difference to retirement outcomes.

An area of concern is at benefit review stage as, in the context of poor mathematical and financial literacy, annual benefit statements do not engage employees. This raises the question whether the information contained in such statements actually gets through to employees as they are usually too complex for the average employee to understand.

Simple visual cues

What about a series of visual cues – such as presenting figures using a traffic robot type format (red, yellow and green) – that provide an immediate visual impact anyone can understand in order to engage employees to take corrective action to build lifetime wealth?

These cues could then be accompanied by recommendations derived via algorithms to mitigate any shortfalls and immediate employer-based access to financial products.

A further improvement would be to communicate the tax consequences of early withdrawal from a fund, as the lack of preservation is one of the leading drivers for the poor retirement outcomes faced by South African fund members. Employees are not aware of the immediate effect of not preserving and are even less aware of the overall impact on their ability to create lifetime wealth.

Employees should be informed when leaving an employer that under current tax laws:

• an early withdrawal of, say, R1 million will result in a tax payment of R207 000, not to mention the loss in growth of these savings over many years.

• for a 45-year-old who earns 10% per annum until retirement, a sacrifice of R207 000 would result in a roughly R1.4-million reduction in their lifetime wealth.

By transparently communicating with and engaging employees at the decision point, employers can influence them towards making more financially responsible decisions.

Explore initiatives

Employers should explore multiple initiatives to raise awareness about the retirement savings journey.

People are used to banks sending them SMSs when their salaries are paid in and when their debit orders start going off – so why not leverage employees’ existing familiarity with this platform to engage them on their retirement wealth creation?

A detailed breakdown of their monthly retirement contributions and deductions, plus their retirement wealth value, delivered to each fund member by SMS could spark ownership of their respective retirement funding journeys as it creates top-of-mind awareness.

Obstacle to better outcomes

Another major obstacle to achieving better retirement outcomes for fund members is the capability of human resources (HR) departments in many corporates. HR departments are typically focused on procedural commitments and typically do not possess the right skills to provide financial guidance and/or are constrained by FAIS.

Also, retirement fund outcomes are not part of their key performance measures but we believe they should be – HR plays a critical role in moving employees to a better retirement outcome as they are effectively the link between the fund and the members.

In fact, the Benchmark Survey highlighted that 1 in 3 employees view HR as their single port of call for retirement funding matters. What gets measured gets done, and we’re not measuring the employer’s efficacy in moving employees towards better retirement outcomes despite their critical role in the retirement funding system.

Motivated employers

Employers have a significant incentive to care for the financial wellbeing of their employees, as research strongly suggests it can be a source of long-term value and a competitive advantage arising from increased productivity and reduced absenteeism.

It is time for employers to take bold steps to improve their financial wellness programmes, of which retirement funding is a core pillar.

The culture of funding under abdication and apathy has to come to an end so we can move towards a win-win situation where employees are better equipped to build lifetime wealth and employers benefit from a more productive workforce arising from reduced financial stress. This requires a shift to engaged employerism, and it can be done pragmatically and professionally

‘Crucial decisions are made without proper advice, adequate communication or appropriate guidance.’

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