Working South Africans require meaningful connections to make better financial decisions, as they are projected to retire on only 40% of their final salary. Current retirees’ starting pensions amounted to 31% in 2020, an improvement from the previous year’s 28%. This is still a long way off from what is considered ideal.
They need better connections to their retirement funds, to their options at key stages in their careers and to the long-term impact of their decisions to change their retirement picture for the better. In addition, planned reforms by National Treasury to introduce the “two-bucket system” will help improve the outcomes further.
The main driving forces resulting in the current disconnect include:
- a one-dimensional employee benefit consulting framework that does not consider the employer, fund or individual holistically
- one-size-fits-all approaches being used in designing employee benefit programmes
- ineffective communication strategies
- high levels of indebtedness among members
- the impact of Covid-19, which amplified existing risks and challenges
- low levels of financial literacy and engagement among members
- gender pay inequality, where females continue to earn less than their male counterparts, which translates into lower contributions for females
Using empirical data sourced from almost a million members of retirement funds, Alexander Forbes Member Insights™ is the most credible retirement fund analysis available in South Africa and has been running for 16 years. It exposes, explores and extrapolates trends in fund member data to create insights that can be used to improve outcomes.
Only 6 in every 100 members can retire on more than 75% of their pensionable salary
According to Member Insights, only about 6% of retirement fund members can expect an income in retirement above 75% of their pensionable salaries. However, retirement funding stakeholders, including employers, trustees and advisers, can improve this by forming more meaningful connections with members.
This year, data beyond the traditional retirement data was linked to provide more thorough insight. The results of Member Insights serve to amplify our collective responsibility to better connect with members via access to information, education, counselling and advice. We have hard evidence of the impact on decisions when such connections are improved and are convinced that this will make a positive impact on people’s lives.
The implications of Covid-19 on retirement outcomes are evident in the research, which found that:
- About 30% of retirement funds implemented contribution holidays or reduced contributions.
- Many of the funds had since recovered and only 5% of funds still have these relief measures in place.
- Average contribution rates reduced slightly from 14.18% to 14.10%.
Reforms to address lack of savings
Alexander Forbes supports proposed reforms to address the lack of savings in South Africa in a two-bucket proposal that will allow for greater preservation with limited pre-retirement withdrawals from retirement. Approximately 90% of members do not preserve when changing employers, largely as a result of a lack of financial literacy or the need for immediate access to cashflow.
Alexander Forbes has evidence of substantial increases in preservation when the appropriate engagement mechanisms are introduced through the employer and fund to enable better connections with members. The two-bucket proposal provides an additional pragmatic response to meet both the short-term and long-term needs of members. Further details are expected to be tabled with the Medium Term Budget Policy Statement on 4 November 2021.
It is important for members to have full access to professionalised retirement benefit counselling and for the two-bucket solution to balance the trade-offs between long-term retirement savings goals and short-term financial needs.
Interventions that can improve outcomes
Member Insights proposes solutions to improve retirement outcomes:
- Integrated advice frameworks across retirement funding, investments, life insurance, healthcare and personal financial planning that enable a coherent response to meet the financial needs of members
- Monitoring the real impact that interventions are having in improving outcomes
- Mature and robust retirement benefit counselling available across multiple channels to make it easy for members to access appropriate information
- Financial literacy training geared for the both the physical and virtual workplace to equip members to make better decisions
- Inclusive financial advice to ensure that members across the economic spectrum are supported through their lifetimes
- Use of technology to connect members with their decisions such as the Alexander Forbes My Retirement Picture.
Millennials are hardest hit by Covid-19
Member Insights also says millennials have been hardest hit financially by Covid-19 and are at the highest risk of loan defaults. The analysis found that at least 14.11% of loans taken by Early Millennials were in default, followed by Late Millennials at 4.79%, Generation X at 2.27% and Baby Boomers at just 0.94%.
When it comes to financial risk, females have lower risk than males, with the debt-to-income ratio of females at 74% compared with 80%% for males, while 48% of females had overdue loans compared with 51% for their male counterparts. At least 41% of females had taken unsecured credit compared with 49% of males, while 51% of females had secured credit compared to 54% of males.
On average almost 55% of female members have the ideal debt-to-income ratio. They are spending between 20% and 40% of their monthly income on repaying debt.
Member Insights also indicates that the gender pay gap in South Africa is still high based on the analysis of the pay gap across the major nine sectors, including the public service. It says on average, for every R1 a male member earns, a female member earns 83 cents.
If we look at the top 10% of the highest salaries, the gender wage gap is 7%, meaning for every R1 a male member earns, the female member earns 93 cents.
However, the gender wage gap disappears when one looks at the bottom 10% of the lowest salaries, where for every R1 a male member earns, a female member also earns R1.
Lastly, the starting pensions of male retirees were 35% of their final salary, whereas for females it was 26%. This gender gap in relation to pensions is a result of decades of inequality, breaks in careers, wage differences as well as the higher cost of converting accumulated savings to an income for females.
John Anderson, Executive, Investments, Products and Enablement, Alexander Forbes, and Ntsheki Molefe, Regional Executive, Retirements, Alexander Forbes.