Is your retirement scheme targeting good outcomes, asks Old Mutual's Andrew Davison?
Professional boxer and two-time world champion George Foreman once quipped: “The question isn’t at what age I want to retire, but at what income.” For every employee who dreams of a comfortable retirement one day, Foreman hit the nail squarely on the head with this statement. While the typical retirement age for South African employees is 65 years old, reaching this age is by no means a guarantee of a happy and financially secure retirement – even if you have been a member of your company’s retirement fund throughout your working life.
A financially secure retirement depends on making sound decisions during the two key phases of one's life, namely accumulating enough savings during the working years and then converting those savings into a life-long income after retirement.
By Andrew Davison, Head of Investment Consulting: Old Mutual Corporate Consultants
Through the retirement funds they have in place, employers have a responsibility to help their employees to achieve such a successful retirement. Delivering on this responsibility requires two things: Firstly, employees need to be guided to make good decisions about how much of their income they need to save towards retirement while they are working and how these contributions should be invested. Secondly, they need assistance and knowledge to allow them to decide how best to use their accumulated savings, at retirement, to buy a pension that will keep up with inflation and last for their lifetime.
Let's take a closer look at both responsibilities.
1. Ensuring your employees are saving enough each month and investing these contributions correctly
Few employees have the financial knowledge to set appropriate retirement goals or make the right decisions regarding where to invest their retirement savings to ensure they accumulate sufficient savings to give them the best possible pension throughout what could be a lengthy retirement.
As a result, the monthly contributions of many fund members are too low. This is usually because people don't take a long-term view and prefer to maximise take-home pay now, rather than putting enough of it away for the future. Retirement funds often don't provide enough information to educate members on appropriate retirement goals and the impact of their decisions.
Common mistakes include not explaining the impact of failing to preserve savings when changing jobs, not making it easy enough for employees to move their savings to their new employer, setting the minimum contribution rates too low, so the choice of more take-home pay is too easy, and insufficient education about the need for growth from the investment choice and the dangers of reckless conservatism.
To address these issues, employers need to fully analyse their employees' retirement savings needs and set appropriate goals that the retirement fund aims to achieve for members, and then to identify the gaps that exist between where members are and where they should be. This allows the management committee of the retirement fund to monitor the progress of all members of the fund towards reaching their goals and to make informed decisions with regard to the level of contributions, the retirement age, the investment default and any choices as well as appropriate options to allow individual members to rectify their personal situations, if necessary.
Often, this level of analysis requires the expertise of an external investment or retirement consultant, but the results of such analysis can turn a shot-in-the-dark into a carefully considered and well thought through strategy. This is a small price to pay for knowing that, as an employer, financial director or trustee, you have helped your employees to understand their retirement goals and, more importantly, achieve them.
2. A life beyond work
It's a sad fact that most employees who are members of retirement funds are left to their own financial devices when they retire from their jobs. A change in mindset across the retirement funding industry is required. Members need to be encouraged and equipped to take control of their retirement planning with proper consideration of the time horizons involved both before and after retirement.
This is especially critical when one considers that people are living much longer today than they were 50 years ago. Life expectancy after retirement has risen from around 10 years in the 1960s to over 20 years in the 2000s. And living longer obviously has a massive impact on any person's pension requirements, both in terms of how much they save up before they retire, and how they invest their savings to deliver an income for the duration of their retirement years. The latter requires a clear understanding of annuities, the products that convert a pot of money into an income stream. However, research by Old Mutual has shown that this understanding is lacking among retirement fund members.
In fact, the 2013 Old Mutual Retirement Monitor found that almost 30% of respondents had never even heard of an annuity, let alone having even some insight into which one would be right for their needs. This important decision isn't an easy one, and there are many different types of annuities with different characteristics and features.
While retirement reforms aim to place the onus on funds to provide members with a default annuity option, this is not enough. Every member's circumstances and needs are unique and funds also need to take responsibility for educating their members about their 'at-retirement' options and providing access to professional, cost-effective advice to assist them to make a sound decision.