Why only 6% of South Africans look set to retire decently

Employees are at the mercy of their retirement funds.

Imagine being financially secure at retirement, enjoying your life without financial stress. This may seem like a fantasy in a country where, according to the National Treasury, 94% of people fail to retire with adequate financial resources. Yet, just a few decades ago, that was how most South Africans retired from their company’s defined benefit (DB) pension funds.

It is also still how South Africa’s 1.2 million civil servants can expect to retire from the Government Employees Pension Fund (GEPF), where the government (well, actually, it’s us taxpayers) guarantees their pension fund based upon the number of years they have been employed in the civil service.

Sadly, there are virtually no defined benefit funds left in the private sector.

So how did we get here? In summary, it is the result of vested and conflicted interests. A DB pension is a serious financial obligation that employers must adequately fund (monthly contributions of around 15% of salary). The employer must ensure the contributions are optimally invested for long-term growth (invested in a high equity fund), and that fees are minimised.

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The employer typically reviewed a DB pension fund at every board meeting as it had to fund any mistakes, which were called deficits, meaning pension obligations exceeded pension assets. When defined benefit pensions were the norm, many pension funds recorded deficits despite employing many financial experts, including actuaries and fund managers. For example, the UK university sector’s pension scheme’s deficit was £17.5bn (R315bn) in 2016.

Companies were uncomfortable funding these complex, large obligations, and the pension fund industry saw an opportunity to earn higher fees by advising pension funds to transfer these obligations to employees. This convenient marriage led to the introduction of defined contribution funds, where the employer no longer guaranteed the benefit (your pension). The only thing guaranteed was the contribution you made!

The solution to a problem that companies and their army of expert advisors could not solve was thrust upon unsuspecting employees. The retirement fund industry sold the solution as being good for employees, who could now choose their own investments and contribution rates. Employees were told they were the winners.

The true winners were companies, which no longer carried this financial obligation, and the retirement fund industry, which could charge unsuspecting employees for more services and at higher costs. Senior executives stepped down as pension fund trustees and the pension fund obligation was removed from the board’s agenda. The service providers could now negotiate with employees, many of whom were financially unsophisticated and had little choice but to accept whatever “advice” they were given.

Today, the tail wags the dog. Pension fund consultants determine what information they provide to trustees. Trustee board packs are voluminous, but hide more than they reveal. The result is that most people fail to retire adequately but the industry thrives.

But it does not have to be this way. The good news is that there is a proven way to get better value for your hard-earned savings, but you need to take charge and do a little work. Thankfully in today’s digital age, Google can help demystify the retirement fund industry.

You need to do three things to dramatically improve your retirement outcome.

Firstly, you must save adequately, which is at least 15% of your total salary, and resist temptation to cash in along the way. If 15% is too high today, save what you can but commit to increase this by 1% or 2% at each salary increase and also include any bonus in your savings.

Then, you must invest for long-term growth rather than focus on short-term stock market performance. This is best done by investing in a high equity index fund, also called a balanced fund, where around 75% of your money is invested in local and international blue-chip companies.

Finally, you must reduce the total fees you pay to your advisor, asset manager and product provider.

This is best done by keeping things simple and investing in a low-cost index fund. Research shows that most fund managers do worse than the market, so you pay high fees to underperform. Rather, pay low fees to earn the market return. You don’t need an advisor to pick index funds so you avoid ongoing advice fees. Each 1% you save in fees can increase your final pension by around 30%. These principles also apply at retirement if you invest in a living annuity.

Steven Nathan is the founder and CEO of 10X Investments, www.10X.co.za, an authorised financial services provider, licensed retirement fund administrator and investment manager. 10X (pronounced ten-ex, not ten times) provides a range of simple, effective, low cost solutions to retail and corporate retirement savers, and manages several billion rand in private and corporate retirement investment funds for clients such as Virgin Active, EOH and Macquarie among others.

This article appeared in the August 2018 issue of HR Future magazine.

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