Issue: December 08/February 09
It’s about savings, stupid. When people’s savings are being decimated by goings-on in the stock market, how do you encourage them to save for their futures? You explain to them how not to behave stupidly. Savings institutions and government had better get cracking.
Expect cries of anguish when members of retirement funds receive their annual benefit statements within the next few weeks. Even those who previously might not have bothered to study the statements – pensions are supposed to be so boring! – will have heard something of the market turbulence and many will be anxious to see how it’s affected them.
What they’ll see is a deterioration, possibly a severe deterioration, in their circumstances against the year that has passed. Trustees will be faced with questions whose answers are pretty obvious, but uncomfortable to answer nonetheless. “Why haven’t we got the inflation plus 3% that you’d mandated?” “How’s it that professional experts couldn’t protect our capital?” “What happened with all those fancy instruments for risk management that were supposed to cushion our savings?”
Be prepared. Losing money tends to focus the mind. In the severity and suddenness of this crash, all asset classes have been hit. Try the standard responses of looking to the longer term, and of the prudence in diversification, to test how well they go down. Good luck.
The longer a member has been in a fund, the less affected he’ll be. Similarly, the longer he still can contribute, the better off he’ll be. Years of accumulation, and the power of compound interest, pay off. For most, however, this will not be the case either because they have saved for too short a period or because they haven’t preserved their pensions. An industry estimate is that fewer than 9% of South Africans will retire financially independent.
With the JSE all-share index having plunged during the year by almost 40%, following a particularly disastrous few weeks in October, fund members who’d hoped to retire soon might be forced to reconsider. Even those who’d planned conservatively for their retirements, by switching away from equities, will have diminished portfolios. Only the cash component, which will be chewed by inflation, has retained its nominal value although not against a weakened rand.
Eventually, the markets will rebound. But nobody dare suggest what “eventually” might mean in returning to the heady peaks of recent memory. Eventually, share prices will find a bottom and then stabilise. But they can stabilise in a trough for longer than the past few years of exuberance, wiping those returns into oblivion. The sheer trajectory of the current meltdown is indicative of a worldwide recession waiting to worsen; an expectation that corporate profits, hence dividends, are in for a chill that will keep the markets cool.
Or they can bounce back quickly, depending on the speed with which government actions abroad gain sufficient traction to stimulate the global economy. Experience is no guide; there has been nothing previously like this, and histories of earlier crashes vary in their periods to recovery.
Against a background of savings being decimated, a formidable challenge confronts financial institutions and government. It is to encourage savings, now more than ever. They must blow into the wind, harder than the wind itself.
It’s easier said than done. Such are the low levels of investor confidence and consumer education, and such is the financial plight of households, that dissaving is more likely to exacerbate: the lapses and surrenders of life-assurance policies, the cashing in of retirement annuities, the withdrawals from unit trusts, the borrowing against pension funds.
These are the symptoms of panic and desperation. Panic won’t help because it’s too late. A message that must be driven through is for individuals to avoid dissaving as much they possibly can. To sell into a panic is to sell at the worst possible time.
Desperation is a different story. The scale of overspending, when interest rates were lower and loans were easier, is manifest in the extreme levels of car and house repossessions by the banks. Consumers have done themselves no favours.
There will be a little relief as interest rates are moderately cut in coming months. The reality, though, is that it will offer relief to paying off debt rather than to stimulating savings. That’s as much due to the horrible extent of household debt as it is to the horrible lack of a savings ethic.
Cuts in interest rates are good for consumers, so they invariably receive a rah-rah press. The flip side is that low interest rates carry bad consequences for several other lobby groups, not least people who rely for a living on savings portfolios weighted toward fixed-interest securities. Since the voice of pensioners is drowned, they’re rarely given a thought.
Give them a thought now. It’s to everybody’s advantage because everybody hopes to be a pensioner someday. Few people in retirement have much chance of re-entering the job market. They must live on what they’ve saved, and their savings are being hammered like everybody else’s.
The effect of this crisis on retirees, and imminent retirees, is hardly sanguine. The first report of National Treasury on retirement-fund reform, published in the happier days of 2005, offered various estimates of replacement rates (essentially, the percentage of final salary paid to a fund member on retirement). Taking a 3% average annual after-inflation return, for instance, it indicated that a person who’d contributed to a fund for 10 years before retirement would receive 8,6% of final salary; a person who had contributed for 45 years would receive 67% of final salary as a pension.
retirees, is hardly sanguine. The first report of National Treasury on retirement-fund reform, published in the happier days of 2005, offered various estimates of replacement rates (essentially, the percentage of final salary paid to a fund member on retirement). Taking a 3% average annual after-inflation return, for instance, it indicated that a person who’d contributed to a fund for 10 years before retirement would receive 8,6% of final salary; a person who had contributed for 45 years would receive 67% of final salary as a pension.
These are the concerns for defined-contribution (DC) funds, overwhelmingly the most popular in SA, where members bear the investment risk. But some of the largest funds, the massive Government Employees Pension Fund being the outstanding example, are defined-benefit (DB) where the employer is liable for the pension promise to pay a defined proportion of final salary. In the GEPF instance, it will be government. A drain on the fiscus will mean lower allocations for other projects, or higher taxes.
At least the swing from DC to DB has spared privatesector employers the obligation to fund final pensions. Abroad, where DB funds continue to proliferate, the pensions liability plays havoc with corporate balance sheets. Employees in SA might rue the day they were talked into the conversion from DB, but employers certainly won’t.
So there are bits of consolation. There’s better. It’s that the market is offering quality shares at bargain-basement prices. A lot of people, with the wherewithal to save more, are going to make a lot of money. Just wait.
That must be the message of the moment, just to wait. Let it be heard loudly and clearly. Let it come from the institutions that make it their business, and let it not be qualified by a new government tempted to tamper in ways that undermine the propensity to save.
For we don’t want our grand spending plans and social visions to become overly reliant on foreign capitalists, do we now?