Edition: Dec 2014 - Feb 2015

Consumers differ on compulsory contributions

South Africans who do not currently have a pension or provident fund are divided on whether a government-sponsored pension fund should be compulsory, Old Mutual Corporate research into auto-enrolment has found.

The research surveyed more than 800 workers between the ages of 18 and 64 (either full-time, part-time or self-employed), who do not currently have a pension or provident fund, to gauge how satisfied workers are with their financial provision for retirement. It also sought to ascertain their views on compulsory membership of retirement funds.

Notwithstanding the postponement for implementation of T-day from March next year (when a new dispensation for the tax treatment of retirement-fund contributions was to have taken effect), government is committed to promoting efficient savings. This is by introducing retirement reforms that will encourage employees to save and provide adequately for their retirement, while also encouraging employers to provide retirement-savings plans for their employees as part of their contracts.

Government-sponsored fund

One proposed solution is legislation that will make it compulsory for every employee, who does not currently belong to a pension fund, to belong to a government-sponsored pension fund.

The survey revealed that 51% of respondents believed employees should not be allowed to opt out of such a fund, while 49% indicated they should be able to.  

Craig Aitchison, General Manager for Corporate Customer Solutions at Old Mutual Corporate, points out that those respondents who selected opt-out are mainly driven by the principle of having the right to choose (55%), followed by a concern that they might not be able to afford the contribution due to limited monthly income (18%).

"In comparison, only 8% cited a lack of trust in government. It is encouraging that this is not seen as a leading reason for why respondents should be allowed to opt out of the fund," Aitchison notes. "While respondents were evenly split on whether they would want to opt out, two in three said they would be likely to join such a fund if it was introduced, with 39% saying they were completely likely to join and 30% very likely. This suggests that South Africans do see the benefits of being part of such a fund."

Full-time and part-time employed respondents were significantly more likely to choose to be part of the fund. Self-employed respondents were significantly less likely to do so.  

Employer-sponsored funds preferred

Respondents were also asked how much they liked the idea of the implementation of an employer-sponsored pension fund. A significant 67% indicated they liked it either "very much" or "somewhat".

The research highlights consumers' strong interest in having a say and some control over their fund, with 66% of respondents stating that the employee and employer should jointly decide on fund investments.

When asked which fund they would be more likely to join – assuming the benefits are the same for both – 49% of respondents selected an employer-sponsored pension fund. Only 15% chose the government-sponsored fund.

Aitchison believes that this choice is influenced by people wanting to participate in the investment decision-making process: "Consumers may feel they are less able to influence a government-sponsored fund than an employer-sponsored fund."

Poor preparations

Many of the survey findings highlight the urgent need for government to implement retirement-reform initiatives. One such finding is that the majority of respondents hold a bleak outlook of their current financial situation, with 52% stating that they were not satisfied at all with their current retirement provision. Only 7% reported being completely satisfied.

In addition, almost one in five respondents revealed that they would supplement their retirement funds by looking for another job in retirement.

Click to enlarge

Most respondents (70%) reported that they have a formal savings product. Yet only one in four has a retirement annuity. The others hold products such as life assurance and funeral policies.

This finding corroborates the recent Old Mutual Savings & Investment monitor research. It showed that 80% of respondents wanted to learn how to save, but that many haven't yet translated their awareness into action. It also revealed that 30% have never seen a financial adviser.

Aid needed

When respondents were surveyed on the things they could do differently to make them feel more secure and satisfied when they retire, 43% said that they would increase their monthly savings contributions. However, with the current pressure on household incomes, some respondents said they would find it difficult to put extra money aside for retirement savings.

While one-third of consumers said they should be contributing more than 15% of their salary to a pension fund, only 10% felt they are in a financial position to make this commitment. 

In short, these findings corroborate that some respondents do take action to increase their retirement savings. But many do not and are concerned about their ability to save for retirement.

Aitchison concludes: “Government should therefore act to create a retirement-saving system that encourages all employees to save for retirement, and offers them employer-sponsored plans with some form of decision-making participation in terms of fund offerings, as well as an opt-out option.”

For more information about Old Mutual Corporate, visit www.oldmutual.co.za/corporate

Old Mutual is a Licensed Financial Services Provider.
old mutual logo