This is one of the findings from the latest Member WatchTM analysis, commissioned by Alexander Forbes.The 2018 Member WatchTM has the biggest membership and employer groupings data sample of all retirement fund surveys available in South Africa.
Millions of South African employees rely on the money saved in their employer’s retirement fund to provide them with an income in retirement. For many people, this is their only formal savings for retirement. Unfortunately, too often, this money is not enough to sustain them in retirement.
The 2018 Member WatchTM also identified a narrowing of the salary differential between men and women. The average salary for female members increased by around 47% to R211038 in the 2018 Member WatchTM (2010: R143154), while the average salary for male members increased by 41% to R241831 (2010: R171576).
Prinsloo said the trend of increasing normal retirement ages can clearly be seen in the findings of the 2018 analysis. A few years ago, the most common retirement age set by employers was 60 years. That has now increased to 65. Increasing one’s normal retirement age by two years can add 8% – 15% extra income at retirement. Retiring at 65 rather than 55 can almost double a replacement ratio due to the compounding effect.
A comfortable retirement is, however, possible if employees contribute sufficiently from a young age and do not cash out when changing jobs. Members need to be given clearer and more useful information, with milestones indicating at which age certain achievements should be reached. For example: Someone who is 40 years old should have saved 3.2 times their annual salary to be on track to achieve a 75% replacement ratio.
The following factors, when combined, affect the income a member receives in retirement from a defined contribution fund:
• the overall level of contributions made to the fund
• the expenses deducted for risk benefits and administration costs
• investment returns after fees
• the portfolios the member is invested in
• how the member’s salary has progressed
• how much is lost to non-preservation along the member’s saving journey
• how much of the retirement savings is used to generate an income
• how much pension each rand of savings can purchase at the time of retirement.
Member WatchTM analyses retirement fund membership activities and the behaviours related to these factors. The effect of these factors on the expected income in retirement can be analyzed and corrective action taken.
Employees largely rely on their employers and the trustee-provided choices, as evidenced by fewer members making investment choices. This highlights the importance of default investment portfolios and we have also seen the importance of fund-supported solutions, such as annuity strategies, to help employees navigate to retirement security. There is an opportunity for companies to help their employees along their full financial journey.
Funds, trustees and employers should ensure the fund helps members address each of the issues around these factors:
1. Review retirement ages where possible.
2. Review member communication and engagement strategies.
3. Review the level of pensionable salary members use and communicate and educate the members on this issue.
4. Encourage and facilitate members in reviewing whether their retirement savings are on track – provide them communications on progress, highlighting gaps.
5. Allow members to make additional contributions to the fund or consider mechanisms to increase contributions such as auto-escalation.
6. Implement fund-supported solutions for preservation and annuities.
7. Goals-based investment strategies can improve income certainty.
8. Implement solutions for wider financial well-being, such as emergency savings, to help individuals consider preservation more favourably.
It is also important for members to participate in these issues and take responsibility and accountability for their own retirement.
Member WatchTM is now in its 12th year. It analyses the data of more than one-million South African employees to gain insights into the savings behaviours of South African retirement fund members and the outcomes these members can expect at retirement.
Michael Prinsloo is the Managing Executive of Research and Product Development at Alexander Forbes.