news 2017 old mutual retirement monitor reveals decline in preservation

The Monitor tracks trends in the attitudes of retirement fund members towards pre and post retirement over the span of seven years, with the aim of understanding how they view retirement planning.

Malusi Ndlovu, Head of Old Mutual Corporate Consultants, says this dramatic decline in members’ intention to preserve is very concerning.

“Between 2012 and 2016, the number of working South Africans who are likely to cash-in their retirement savings should they have the opportunity has increased from 19% to 35%. Studies show that this is one of the most value-destroying behaviours when it comes to long term savings, as it reduces the impact of compound interest.”

Making the national outlook worse, Ndlovu adds, is the fact that 30% of working South Africans have no formal retirement savings vehicles at all. “This statistic jumps to 58% among people earning less than R5 000 per month. This group is the most vulnerable, as they often do not have any discretionary savings either or own any property that they can sell to finance their post-retirement lifestyle. As long as this situation continues, a significant reliance on the state old age pensions will remain, and at only R1 600 per month the state pension cannot provide real security.”

He goes on to say that the increasingly high dependency ratios in families make the need for retirement savings even more urgent. “About 23% of working South Africans are part of the ‘sandwich generation’ that supports their children as well as their parents. What’s alarming is that this percentage increases to 25% for those aged 55 and older, including those earning as little as R5 000 per month.”

While many South Africans admit to being worried about their financial situation, a large majority feel trapped. “As many as 73% of surveyed individuals believe that in today’s society, there is no alternative but to get into debt. This figure has been steadily increasing every year since 2010, when the figure stood at 60%.”

The percentage of non-fund members who expect to work after retirement has risen from 52% in 2012 to 58% in 2016, highlighting the benefit of being a member of a retirement fund and having structured retirement planning.

The reality, however, is that only 70% of working South African respondents belong to a retirement fund (either employer sponsored or private). And of those that do belong to a retirement fund, Ndlovu points out that the majority (61%) do so through their employer arrangement. “This underscores the important role employer-provided vehicles play in encouraging responsible financial behaviour.

“Employers can assist by choosing appropriate defaults for retirement fund members. 61% of members actively chose the default portfolio because they trusted it was appropriate or did not feel confident about making an alternative choice. Where member choice is provided, only 8% have changed their investment choice in the last three years. When it comes to choosing an annuity, 45% of members want the fund to recommend an option or to provide a range of pre-selected options. This is as high as 54% for those earning less than R5 000.”

Ndlovu concludes that employers need to work together with qualified consultants to design retirement structures that make positive retirement outcomes possible for their employees. “This is particularly important for employees who are financially vulnerable and rely on guidance from experts to make the right financial decisions. While the industry is making inroads in promoting awareness of the importance of preservation and proper financial planning, there is still plenty of work to do to ensure that South Africans can retire in comfort.”