Members are looking at retirement fund suspensions and financial literacy for survival during lockdown.
On Thursday morning, 9 July, Sanlam Corporate CFO Jocelyn Hathaway (pictured) and managing executive Viresh Maharaj made sense of how retirement funds are helping employees during the current Covid-19 crisis and explored how to best enable financial resilience and prosperity for employees in this rapidly changing environment.
After an introduction by CFO South Africa MD Joël Roerig, Viresh revealed the results of Sanlam’s 2020 Benchmark Research report into employers, retirement funds and professional consultants to highlight the benchmarks for employee benefits in the current Covid-19 crisis.
“We genuinely believe that structuring the suite of employee benefits optimally can make a meaningful difference in the minds of individuals across the country,” Viresh said.
He then explained that the research has followed the ebbs and flows of the retirement fund in South Africa, with a focus on occupational retirement funds. Over the period of 40 years that the research has been conducted, the Sanlam benchmark research has been conducting an exploration of the experiences and quantitative analysis of retirement funds across the breadth of South Africa’s retirement funding industry. In order to provide stakeholders with objective data and insights to help them make better financial decisions.
“The traditional research has focused on various aspects of retirement funds and were contextual at those times. For instance, over the last couple of years, we’ve focused on the impact of the default regulations that were introduced last year. Now the obvious elephant in the room this year is the impact of Covid-19,” he said.
Sanlam found that an overarching theme emerging from the research is that the focus of institutional retirement funding is shifting towards engaging individuals themselves,
Retirement funds and employers are not insulated by the impact of Covid-19 and lockdown on personal finances, and therefore, Sanlam received a number of requests to temporarily suspend a number of retirement fund contributions of employers and employees in order to provide a means of financial relief.
“On those suspensions, what we find is that the average or most popular duration of that temporary suspension is around three months. With six or more months being the next most popular,” Viresh said.
He explained that many of these suspensions will be rolled over in time given that the economic recovery in South Africa is going to be prolonged and the return to normal is going to take far longer than most of us would want.
“How does this affect the retirement fund?”
If you take a six-month suspension of contributions, Sanlam has modelled the impact on the final fund value based on a range of conservative assumptions. “The net effect of the suspension ranges between 1 to 3 percent of the final fund value, which is not material against the pressing current need for survival and the immediate cash flow relief that suspending retirement fund contributions provides to affected employees,” Viresh said.
Sanlam also looked at the actual value of such relief and what difference that makes on employees’ lives. Based on average contributions and average tax rates as well as the average salaries, the net increase in pay due to the suspension is around R1,500 per month, per employee. “When you take into account the government Covid-19 special relief funds of R350 to unemployed persons, it provides a relative view of the impact that R1,500 can make on an employed person,” he added. “So we believe it’s still a meaningful amount of income for the majority of South Africans, and can make a meaningful difference in their lives, especially when they are under financial distress as a result of lockdown.”
Smart financial management
While suspending retirement fund contributions is one way to ensure financial security during this difficult time, Jocelyn said that financial literacy is also a very important part of individuals’ survival.
In the survey, the most popular advice themes consultants had for employers and funds related to member communication, engagement impact and use of data to impact members. “High-quality financial advice is a factor in all of these,” she said.
Sanlam explored how employers and funds have executed financial strategies. 10 percent of consultants indicated that their clients did not have any advice strategy in place, 40 percent directed members to seek their own financial advice, 40 percent have appointed salaried advisors to help their members, and 10 percent said members had their own financial advisors.
“While we support the 40 percent who have put a financial strategy in place for their members, it is important that employers and funds educate their members on financial literacy,” Jocelyn said. “Education is the cornerstone of making sound financial decisions and we would expect employers and funds to consider how to scale up the breadth of such training into the future.”
Looking to the future
Sanlam then asked the survey participants to indicate their views on how to rebuild the South African economy. “We found that the most popular option was the use of the large pool of unclaimed benefits in the industry to beneficiate poor communities, which is a promising and potentially responsible use of monies that are unlikely to be reclaimed by the majority of the members,” Viresh said.