Pension savings may not be enough
You may be on course for a crash landing at retirement
Article by Laura Du Preez, Business Times
Many retirement fund members mistakenly believe that if they are contributing to a retirement fund, it will be enough to ensure a comfortable retirement - the fund or its sponsor will do the rest.
But, even though retirement funds set up default investment options best suited to the membership, you may still be on course for a crash landing at retirement because you are not saving enough each month and/or not saving for long enough.
Retirement funds canvassed in the latest Benchmark survey expect that 80% of their members will have to lower their standard of living significantly in retirement.
Principal officers and trustees who participated in the survey are aware of this, but in focus groups with members, researchers found that members mistakenly believe that just by contributing to a fund they have done all they need to do, says Viresh Maharaj, CEO of corporate sales and marketing at Sanlam.
If you are a member of a defined contribution fund - one that pays out the savings in your fund rather than a pension based on your final salary - in order to retire with between 60% and 75% of your final salary, you need to contribute enough, for long enough - without withdrawing any of your savings - and earn above-inflation returns that a reasonable exposure to listed shares and property will deliver.
21% of your final salary is what you can expect as a pension if you are contributing only the average of 13% of your salary for 20 years
The Benchmark survey of 100 funds, 100 employers and 100 employee benefits consultants reveals that most stand-alone fund members and their employers are together contributing 16.6% of their income for retirement savings and group life, while umbrella fund members and their employers are contributing 16%, says Maharaj.
Sanlam estimates that on average the net amount that goes into members' retirement funds after premiums for group life benefits, administration and consulting fees are deducted is 13%, he says.
If you save this amount every month for 40 years from age 25 to age 65, you will end up with enough savings to buy a pension equal to only about 56% of your final salary. To reach 75% of your final salary you need to contribute for 45 years.
However, if, like many members, you start saving later or only preserve your savings from a later age, you are likely to end up with a much lower pension - about 36% of your pension after 30 years, 21% after 20 years and only 9% after 10 years, says Maharaj.
This assumes an annual average investment return net of fees, of inflation plus 5% that you can typically achieve in a balanced fund with high exposure to equities.
Reducing cost alone will not ensure a better retirement
Contribution levels and group life benefits are determined by your employer and/or umbrella fund, but the length of time you contribute and the decision whether or not to preserve your savings when you change jobs are factors you control.
In addition, most retirement funds allow you to make additional voluntary contributions to your fund, and for most South Africans these contributions will be tax deductible.
Maharaj says though administrators and asset managers should do everything they can to limit costs, reducing costs alone will not ensure members a better retirement.
Taking all administration and investment fees out of the equation could give a member saving 13% of his or her income for 40 years a pension equal to 74% of his or her final salary, but for members saving for shorter periods, pensions range between 11% for a member saving for 10 years and 45% for a member saving for 30 years, he says.
Guy Chennells, the head of research and development for umbrella funds at Discovery Invest, told advisers attending recent South African Independent Financial Advisers Association workshops that a member who starts preserving his or her retirement savings only at age 30 will have only 33% of his or her final income at retirement. And saving half a percent of costs will only increase the income at retirement to 37%, leaving a member wanting a pension equal to three-quarters of their final income with a shortfall of 38% of his or her final salary.
The retirement fund industry hopes that benefit counselling put in place through the so-called default regulations under the Pension Funds Act will result in better ratios of pension to final salary.
The regulations, which oblige trustees to consider the costs of the default investment, preservation and annuity options they put in place for members, are also expected to reduce costs.
Maharaj says another "mega" trend is the consolidation of funds, particularly into large umbrella funds in which many employers share administration and governance costs. This is also expected to have a positive impact on costs, especially once funds administered by members of the Association of Savings & Investments of SA (Asisa) begin disclosing costs at fund level in a standardised way from September this year.
Asisa announced recently that from October next year funds will also disclose costs on retirement savings in umbrella funds in a standardised, effective annual cost to you, the individual member.
What it means if you start saving too late
This will make it easier for you to compare costs on your umbrella fund to those you pay on your retirement annuity and preservation fund.
Maharaj says cost efficiency is important, but members need help to be financially resilient so they are not cashing in their retirement savings to pay debt or failing to save because of health-related costs.
Sanlam has built a financial resilience index that measures employees' income and salary package, debt levels, budgeting, financial wellness, provision for retirement and advice and financial planning in order to guide employers in how to improve their employees' financial situations.
Discovery's attempts to get members to stay invested are focused on a boost of up to 15% on amounts transferred to its fund for members who preserve for 30 years or more. It can also link members' Vitality status to its group life cover costs and offers incentives in the form of savings boosters to healthy members.
Most of the large administrators offer members access to digital tools, like Momentum's Smart Retirement and Sanlam's My Retirement App , that help you track your retirement savings and test the level of income they will provide in retirement.
Use these tools, retirement calculators you can find online or find a qualified and trusted adviser to help you check if your retirement savings are on track.
If you start saving late in your working life, have withdrawn your savings during your working life or are contributing too little, the sooner you tackle the issue of funding the shortfall, the less painful it will be.
- 1,250 - the number of active retirement funds
- 350 - the number of funds busy with transfers primarily to umbrella funds
- 4 - the number of new stand-alone funds launched in the past decade
- 55 - the number of umbrella fund members recorded in last year's returns
- 786,000 - the number of umbrella fund members in 2009
- 1.9-million - the number of umbrella fund members recorded in fund returns last year
- 50% - the reduction in costs in the Sanlam Umbrella Fund over the past decade to R52 per member per month
- 25% - the reduction in costs on Sanlam-administered stand-alone funds to R47 per member per month
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