Edition: Jun - Aug 2014

A new course for DC funds

Employers can offer invaluable help to employees for the achievement of adequate retirement outcomes. Danie van Zyl, head of guaranteed investments at Sanlam Employee Benefits, explains how and why they should.

Research by Sanlam into the SA retirement industry shows that employers have a vital role to play in the continuing evolution and improvement of defined-contribution retirement funds. They're uniquely positioned to assist fund members who're their employees because employers:

  • Have the necessary infrastructure and access to members to facilitate communication to members;
  • Can utilise their new-employee induction processes to help members with their retirement choices when they join the employer; and
  • Can assist members with preserving their retirement savings when they change jobs.

Member apathy

  • 90% of members never revisit their retirement decisions made when they first joined their employer
  • 41% of members invested in the default investment option "Do not really care where the money is invested"
  • 62% of members withdraw their retirement savings in cash when changing jobs, mostly to service debt

Becoming a proactive employer will help address some of the poor outcomes observed in our Sanlam Benchmark Survey over the past few years. This does not mean that other stakeholders do not also have important parts to play, but a member's journey to retirement starts on day one of employment.

It is here that an employer can help put the member on the right track to a better retirement outcome. While working, 51% of members turn to their employer's human resources department for retirement queries.

Evolution of employer's role

With the shift from defined-benefit (DB) to defined-contribution (DC) retirement funds, the responsibility and financial risk of providing a pension in retirement has moved from the employer to the employee. Individual members now have to shoulder the burden of saving enough, investing appropriately and securing and managing their own retirement incomes. While some members thrive on all the flexibility and options available to them, many ordinary members often find the range of choice bewildering.

Poor outcomes for South African retirees

  • 51% of pensioners surveyed not making ends meet
  • Trustees believe that only 13% of their members will retire comfortably

Whereas in the DB environment the employer could rely on actuarial and investment professionals to advise it on how to manage the risk, the same level of expert advice is not usually available to DC fund members. Our 2013 Benchmark Survey shows that 63% of members are unwilling to pay for financial advice.

Instead of looking for help, these members often choose to neglect their retirement savings. This apathy manifests itself in a number of ways.

In a very real sense, many members belonging to a DC fund still have a DB mindset and an expectation of some sort of paternalism from their employer and fund trustees.

A new course for DC Funds
Defined Benefit Fund Defined Contribution Fund New approach to Defined Contribution Funds
Focus on retirement income Focus on accumulation of assets Refocus on retirement income
Provides a fund pension Members has to select own annuity Guide members and provide default annuity option(s) with opt-outs

Danie van Zyl
Van Zyl . . . interests of everybody

Member choice

On retirement, DC fund members need to find their own annuity solution from an array of service providers. Our Benchmark Survey showed that the biggest concerns members have on retirement is whether their retirement savings will last the rest of their lives (67% of members) and whether their retirement income would be sufficient (56% of members).

Given the extent of member apathy regarding their retirement savings and their dependence on trustees during their working lifetimes, it is most unlikely that these same members will suddenly become adept at securing an appropriate retirement income or, in the case of a living annuity, managing their savings over several decades. In stark contrast to the popularity of living annuities, 82% of pensioners surveyed wanted certainty of a guaranteed income for life. Only 18% would accept a 50% chance of a 5% higher or 5% lower income.

The risks confronted by members choosing a living annuity when they retire include:

  • Retiring with inadequate savings, which will lead some to invest too aggressively and suffer investment losses which they cannot sustain. Others may choose a draw-down rate which is too high, depleting their savings;
  • Members unfamiliar with investments may invest too conservatively due to their fear of loss. This "reckless conservatism" may lead to their incomes being eroded by inflation;
  • Members do not appreciate increasing longevity, causing some to outlive their retirement savings.

New course for DC funds

Should one not design a retirement fund with the end result -- an adequate income in retirement – in mind? A targeted retirement income should be the goal of the members and the trustees. All benefit options should help members increase the likelihood of achieving the goal. This extends to nudging members in the right direction at every point where they need to make a choice, either through targeted communication or how the choices are designed and presented.

A new course for DC Funds

By employers and trustees assuming a more active role, they can make a significant difference in members achieving a good outcome in retirement. These actions include:

  • Ensuring that members receive adequate longevity protection upon retirement through an appropriate annuity product;
  • Giving members access to institutionally-priced annuity solutions;
  • Thoroughly vetting members' default annuity options with the help of the fund's investment consultants;
  • Helping members understand that accessing their retirement savings when changing employment to finance debt or discretionary purchases will have a detrimental effect on their ability to retire comfortably.

"Employers which take greater responsibility for the overall financial well-being of their workers, including through the design of their retirement funds, reap the rewards of a more stable and happier work force," said National Treasury in its 2013 retirement-reform proposals.

By taking the lead, employers can make a critical contribution to resolving our county's retirement savings crisis. This the ultimate goal of all stakeholders.