The average SA pension fund member is facing a life of poverty at retirement. Despite putting aside up to 15% of their salaries during their whole working careers, retirees on average face living off 30% of final income at retirement.
So if your "golden years" are going to be anything other than a misnomer, paying attention to your savings and retirement plans is essential. And some financial advisers do not have your best interests at heart, or they are incompetent - horror stories abound.
Retirees' vulnerability comes largely from the switch into defined contribution (DC) schemes that swept the pension industry in the 1990s. Instead of receiving a fixed income for the rest of their lives - a so-called defined benefit (DB) - members are more vulnerable to market performance. In the DB environment, companies were liable for employees' benefits. The incentive was therefore there for them to pay close attention to the investment performance of those savings.
WHAT IT MEANS
 Most scheme members will retire broke
Both members and markets are at fault
|
The luckier retirees live off alternatives such as rental income, or their children. Others don't even have those resources.
Now many are asking, is DC funding a con?
Desiree Partridge, director of pension projects at Standard Bank, believes members were better off in a DB environment. "People in occupational funds are in trouble if they don't supplement their retirement savings. But it is unlikely that most people will save something extra, since our society has a poor savings culture. Consumer spending is out of control."
CLICK ON GRAPHIC FOR ENLARGEMENT
Partridge is concerned that too many people resign to access their retirement benefits in order to service their debts, aggravating their situation.
However, "DC funds are not the problem," says Alexander Forbes actuary and head of retail Gavin Teichner. "It is because people are changing jobs more frequently and do not preserve their (withdrawal) benefits."
Alexander Forbes Member Watch - a well-followed monitor of pension fund member behaviour - found that the average South African contributes to a final pension fund for about 20 years and retires from an occupational fund with a benefit of about 30% of income. The study also found that non preservation of benefits - employees cash in their pensions when they leave one employer instead of transferring their savings to a new scheme - was the major cause of this state of affairs.
The DC philosophy holds that the long-term outperformance of equities over other asset classes suits the investment time horizon to retirement. Regular contributions and high compound interest should allow the accumulation of a retirement benefit that will secure a reasonable pension. But equities are volatile.
CLICK ON GRAPHIC FOR ENLARGEMENT
Even though performance has been good overall - especially in the past few years - members approaching retirement still fear that divestment during a market downside into a capital protection portfolio will lock in those losses.
But the theory holds this can be avoided if equity drawdowns towards retirement are gradual and investment fundamentals, such as diversification, are observed, instead of a move into cash.
In fact, observing investment fundamentals is vital for members of all ages hoping to survive the DC environment.
But Teichner says: "Despite volatility, overall performance and surplus payments make DC funds an attractive place to be." And further, he explains: "Explicit comparisons between DB and DC funds do not show significant performance variables. The reason pensioners find themselves out of pocket is behavioural."
But though employers are criticised by employees for a perceived "outsourcing" of liabilities and responsibilities, employees are not that loyal either.
Rowan Burger, head of consulting strategy at Alexander Forbes, believes this is why DC is the future of retirement funding.
"We are a different generation to our parents, who had a greater respect for authority and loyalty to their employers. We want flexibility and empowerment," he says.
Industry professionals are adamant that the move to DC does not mean employers no longer have any responsibility for employees' retirement. Employers in SA are not required by law to operate a pension fund for their employees, but if they do, those employees are legally obliged to join it.
Ironically, SA has one of the most advanced private and occupational retirement funding systems in the world precisely because its state-sponsored provision is inadequate compared with that of nanny states. Sanlam's Elias Masilela notes that stable work and retirement funding have only recently become inclusive. "In the 1970s SA's retirement funds were split along racial lines as was everything else. Blacks and whites had separate funds as did the homelands from SA," he says.
The irony is that in SA, workers lobbied for the move to DC to get greater control over their finances - and employers took to these funds like ducks to water. They realised the conversions to DC meant they no longer had to foot the bill out of their own pockets if investment returns and contributions proved insufficient to provide the benefits promised in the rules of the scheme.
"We know about troubles with DB funds because their sponsoring companies are listed entities required by law to publicly quantify their net financial position," Johann Swanepoel of Sanlam's SIMLab says. He believes that one result of the move to DC is a difficulty in establishing the health of the collective retirement industry, which has now "disappeared from the public radar, giving a false sense of achievement and security".
Swanepoel points out: "Corporate SA is better off after the move to DC, but the fact is that the risk did not disappear - it only moved from the company balance sheet to each individual's balance sheet'."
