Issue: September/November 09
Warts and all
Far too many of them. They present a challenge for trustees, and not only trustees. Fund members cannot continue in an ignorance that isn’t blissful where their futures and their money are at stake.
De Villiers...forthright findings
It’s okay, fellas, relax! The bull market is back. On the present Alsi trajectory – at time of writing, anyway – the upsurge in JSE share prices since mid-March will see fresh all-time highs tested within months.
No point in worrying too much about the recent crash, quickly fading from memory, that smacked retirement funds’ investment performance. Things are returning to “normal”, whatever “normal” might be, despite the huge burdens of debt and frightening increases in unemployment that will delay global recovery. Hang in there. Enjoy the financial markets running away from the real economy, and all will be well.
It won’t, unfortunately. Financial crisis or no financial crisis, South Africans are in denial – as with the social impact of HIV/Aids – about the extent of funding required for retirement. Those chickens of inadequate savings are home to roost.
Even those who think they’re fairly secure, because they’re members of pension funds, had better think again. The point is vividly illustrated by Sanlam’s latest annual benchmark survey. It shows that, at current levels of contribution from employers and employees (marginally up from last year to 11,3% of salary, far below the savings levels in developed economies), the average fund member will live in retirement on an income 70% lower than in earning years.
And this is for the more privileged who’re in formal employment where pensions saving is mandatory. What of those who’ve borrowed against their pensions, who’ve not opted for preservation on switching jobs, or who’ve been jobless for long periods?
It isn’t a pretty picture, the more so when times of economic hardship cause savings to be drawn down and policies to lapse so that consumers can finance their current expenditures. Exclude from it the cold estimate that 60% of SA’s 20-year old males won’t reach retirement.
Were government to introduce cross-subsidisation of the poorer by the wealthier, which the proposals for pensions reform envisage, the savings pool is still too small to make much more than a token difference; except to help a strained fiscus, unable to provide sufficiently for old-age pensions from its resources, and to clothe the whole in the feel-good concept of “solidarity”, which is a benign term for additional tax.
Bear in mind, too, the impact of inflation. As if it won’t be hard enough to live on a fraction of final salary, forcing down the retiree’s living standard, the chunk of pension had better be invested in a suitable annuity that at least protects the capital from being ravaged. It comes at a cost to the policyholder who, to compensate, will hope like hell that financial markets keep rising faster than the purchasing power of his investments reduce.
What’s the reality? It’s that markets go up, and down, in fits and starts. What’s the moral? It’s obviously that the more saved for longer, the more secure the retirement. The higher the real returns achieved, the higher the extra retirement money.
Over the past year, the survey found, almost a third of retirement funds reported investment returns of between zero and 10%, and another third reported negative returns. Below-inflation performance contrasts with the average 20% return of the previous year. “The ramifications of the global economic crisis are still to be fully realised,” warns Sanlam Structured Solutions chief executive Dawie de Villiers who coauthored the survey.
It contains some disturbing findings. One is the increase in administration and operating costs from an annual average 1,1% of the member’s salary last year to 1,3% this year. It doesn’t sound like much. But consider this, based on 35 years of contributions: if costs reduce the contribution by one percentage point, it equals two years less of retirement money; or, if there’s a half-percentage point cost saving to increase the contribution, a year is added to retirement money.
As a proportion of assets, an excessive 56% of funds are paying over 1% in administration costs. Large funds are close to an optimum 0,4% of assets, but small funds can be paying as much as 5%. The average is 0,9% exclusive of fees for asset management.
Clearly, consolidation of smaller funds will help to reduce their costs. Even umbrella funds, a natural home for consolidation, shouldn’t be precluded from shopping around for best service at lowest price outside their sponsoring institution. “We cannot force costs down to an artificial level,” says De Villiers. “Market competitiveness should result in an optimum cost structure.”
But who’ll push and pressurise for lower costs when an outstanding feature of funds is members’ apathy? It’s paradoxical that members should be so aware of their present-day wants and so unaware of their future needs, let alone the risks they bear in defined-contribution arrangements. Fewer than a third of respondents know the life company in which their funds are invested; more than two thirds cannot name a single member of their fund’s trustees, and a similar number haven’t participated in the election of a trustee.
Over 70% indicated that they didn’t understand how a lifestage model works and almost 20% aren’t even sure whether their fund offers it. And although 68% feel that they have sufficient skills to make investment choices, the survey also reveals that 90% of the working population lacks adequate financial understanding to make decisions affecting their retirement.
Either member communication is ineffective, or consumer education is failing. Or, more likely, both. The choice is whether to accept it, and pay the price. While the national challenge is screamingly evident, the lead in addressing it is sadly diffuse.