Issue: April/June 2010
Edutorials
ABSA

The Value of Retirement Funds to Individuals and Society

Krishen Sukdev

Krishen Sukdev
Consulting Actuary:
Absa Consultants and Actuaries

Introduction

The value of retirement funds can be considered in several dimensions. At an individual Krishen Sukdev level, the key purpose of retirement funds is to provide members with benefits when they most need it, such as when members die, retire, get retrenched or leave the fund. We often get so bogged down in the details and intricacies of retirement funds that it is sometimes necessary to go back to first principles and take a holistic view of how retirement funds benefit individuals and society as a whole. This article gives a high level summary of this.

Individual Level

There are some distinct advantages of members belonging to retirement funds compared to them making risk and savings provision on their own. Retirement funds not only pool savings and risks, but also pool knowledge, expertise and talent. Members benefit from having experts such as actuaries, employee benefits and asset management consultants advising trustees. In a defined contribution fund, the trustees would need to carefully select the investment portfolios on offer and also offer default portfolios where members do not have the expertise to choose their own portfolio. Members also benefit from risk pooling where they can receive risk cover without individual underwriting; the exception being cover in excess of the Free Cover Limit where underwriting is required. In the absence of retirement funds, individuals may not necessarily take the initiative to make retirement and risk provisions.

One cannot, however, understate the value of individual savings where individuals can address any shortfalls in their retirement savings in order to achieve a specific net replacement ratio. A similar principle applies to risk cover where any shortfalls can be made up by individual arrangements. Individuals need to view savings through retirement funds as providing a safety net against poverty but these savings may not necessarily provide them with adequate monies at retirement.

Macro-economic Level

The large pool of savings in any country would need to be invested with a view to maximizing returns, whilst appreciating the risks attached. Retirement funds consider an appropriate investment strategy and these monies mostly end up in the capital markets in instruments such as equities and bonds. These savings thus provide the necessary working capital for government, parastatals and companies which ultimately assists the economy and country as a whole.

Societies as a whole also benefit from retirement funds, not just purely in monetary terms but also because these funds provide a safety net to citizens who otherwise may face poverty on retirement. Financial security means peace of mind for retirees when they do not have to rely on friends, family and government for their wellbeing. For further information please feel free to contact us on 011 244 9000.