Issue: September 2012 / November 2012
Expert Opinion

State of retirement in our nation

Pointers from Danie van Zyl, head of guaranteed investments at Sanlam Structured Solutions.


Van Zyl . . . statistical facts
In May, National Treasury released a discussion document on reform of regulations on retirement savings. Aimed at encouraging a culture of savings and investment, it identified a number of issues that need to be addressed. Many of these were previously highlighted by our Benchmark Surveys.

Several proposals require behavioural changes, on the part of service providers and members, resonating with thoughts from last yearís Symposiumís focus on member behaviour. Consider the most significant issues raised by the discussion paper and unpack them with the help of our latest Benchmark Survey findings.

Reducing retirement fund costs

In the absence of a national retirement fund, many individual employers took on the role of starting employer-sponsored private retirement funds despite not being compelled by law to do so. Over decades this has created a well-established and competitive industry, but also one that was fragmented with many small retirement funds, each with its own set of fund rules and benefits.

To illustrate how these smaller funds struggle to achieve economies of scale, see how the key results from our survey differ between small and large funds.

Members of bigger funds save nearly 1% of salary more than smaller funds towards retirement. It is therefore hardly surprising that smaller retirement funds are increasingly moving into umbrella fund arrangements, standardising the benefits and allowing for more efficient administration of these funds.

Another aspect that influences cost is that some members change jobs and end up having small pots of money in different retirement vehicles. This duplicates certain costs.

Reforming the annuities market

The discussion paper expresses concern that most defined-contribution funds leave members to the retail market when they retire. This is best illustrated by the fact that 84% of trustees/employers polled in the 2011 survey expressed concern about how members use their retirement benefits. Yet only 22% wanted any further involvement with retired members.

The discussion paper confirms our frequent questioning of whether members understand the investment and longevity risks to which theyíre exposed in a living annuity. Despite this, 30% of principal officers believe that a living annuity is the most appropriate choice for the average member.

Figures as a percentage of salary Average
across
all funds
Funds with
101 to 500
members

Funds with
more than
5000 members
Employer contribution 10.24 10.25 10.38
Employee contribution 5.96 5.88 6.06
Total contributions 16.20 16.13 16.45
       
Less death benefit premiums 1.59 1.37 1.59
Less disability benefit premiums 1.11 1.22 1.04
Less administration and operating costs 1.07 1.24 0.56
Total provision for retirement 12.43 12.30 13.26

Preservation and portability

The lack of preservation of retirement savings when changing jobs is a main reason members retire with insufficient savings. 71% of funds estimate that most members who withdraw take their full fund value in cash, often to settle debt or pay for living expenses.

However, introducing compulsory preservation (as proposed in the discussion paper) is likely to be very contentious. Many South Africans use retirement savings for other emergencies, particularly as bridging income between jobs.

Fund governance

The discussion paper suggests that trustees obtain relevant qualifications and expertise in pension fund management. Much time is already spent during trustee meetings ensuring adherence to legislation and governance. Of the three burning issues raised by principal officers in the 2012 Benchmark Survey, two dealt with compliance: PF130 and Regulation 28.

The most common governance instruments relating to investments used are: Investment Policy Statement (86%), Investment performance review (74%) and mandates for each portfolio (71%).

Given the increasing demands on trustees, the more practical solution may be to place the statutory and compliance requirements on the shoulders of qualified professional principal officers. This could be considered alongside the discussion paperís idea of professionalizing the principal officer.

Investments

Last year government reissued Regulation 28; trustees are required to invest assets in the best interests of their members. In addition, they are now required to consider the environmental and social factors underlying investments. 61% of respondents indicated that their fund has not had to make any changes as result of the new regulations.

From our survey, few funds seem to have an appetite for environmental or codes for responsible investment. For instance, 73% of funds have not been influenced by the Code for Responsible Investing in setting up their investment policy statements and have no policies on ESG (Environment, Social & Corporate Governance) criteria, while 69% have no policy to invest in sociallyresponsible portfolios.

Investment mandates normally set benchmarks linked to inflation (63%), a peer group (52%) or index (51%).