The retirement industry has commenced on a path to ensure more South Africans can sustain their living standards in retirement, but regulatory reforms on its own won’t guarantee success.
A lot of this comes down to members understanding how the decisions they take today (not preserving benefits when changing jobs, choosing the lowest contribution option or having a low exposure to shares) could impact the income they receive in retirement. Unfortunately, it seems most members are ill equipped to make informed choices in this regard.
While there are various reasons for this, including the low levels of numerical and financial literacy in South Africa, the move from defined benefit funds to defined contribution funds has also complicated the picture.
As National Treasury explains in one of its early discussion documents on Retirement Reform: “In the former [defined benefit funds], the employer bears the risk of worse than expected investment returns or higher than expected expenses. In the latter, these risks, and the corresponding benefit of favourable returns, are effectively transferred to the individual fund member.”
But unfortunately, most members seem to be unaware of how the onus has shifted and that their decisions will play a significant role in their financial situation in retirement. This is complicated by the fact that communication is often difficult to understand and conveyed in a way that leaves the member none the wiser.
Over the past months, a number of experts have argued that employers are in the best position to empower employees with the right knowledge to inform better decisions around retirement. Unfortunately, this comes at a cost to employers, who are often already struggling to deal with regulatory changes and the associated costs. As a result employers might be unwilling to also voluntarily provide employee education, especially in the case of smaller firms.
Speaking at the 10X Investments Retirement Fund Conference this week, Beatrie Gouws, associated director at KPMG, said it was important to understand that retirement doesn’t happen in a vacuum.
Input from all parties – employers, unions, fund members, principle officers, trustees, administrators and service providers – is needed to “put this puzzle together”.
Gouws said unfortunately, with the move from defined benefit to defined contribution funds, employers have started to move away from taking an active role in member education. She hopes this will change in future. Cliff Barnes, CFP® and independent retirement education expert, said practically they find that many members have no idea about the financial implications of their retirement decisions.
Statistics suggest that the vast majority of South Africans don’t preserve their retirement benefits when they change jobs, despite the fact that it is one of the primary reasons why members don’t have enough money in retirement. “Where’s preservation? It’s frightening. It’s a lack of understanding,” he said. Fikile Shezi, benefits consultant at 10X Investments, said effective member engagement means knowing who the employees are, what type of guidance they require and at what level this has to be provided.
The format of communication is also important and could for example include a text message with relevant information.
Something as seemingly simple as a percentage may be difficult for members to understand.
Gouws said using concrete numbers when communicating with members often allow for a much better understanding of their financial situation and the steps necessary to fill their retirement pot to the required level: for example telling the member that he or she needs to contribute x amount more for every rand earned.
This article first appeared in Moneyweb.