Retirement funds and the Financial Institutions and Markets Act, Act No. 2 of 2021 (FIMA) received significant media focus earlier this year. For a brief time, events such as the war in Ukraine and the rising cost of living were overshadowed by retirement fund debates in coffee shops and around the braai.
With the implementation of FIMA (originally slated for 1 October 2022) being postponed and the FIMA Regulation pertaining to compulsory preservation being withdrawn until further notice, the focus on retirement funds has somewhat diminished. It is, however, still important to consider the status quo of our retirement funds as this is a fundamental savings vehicle for many of us.
My colleague, Paul-Gordon Guidao-oab, recently wrote an article on whether there is still a case for retirement funds. This article follows his article where he focused on the findings of the Old Mutual SA Retirement Gauge (the Retirement Gauge) for 2022. Since there is no similar research being done for Namibia at present and the two countries’ retirement fund industries bear many similarities based on the historic connection between Namibia and South Africa, it is useful to compare notes with our South African peers. Both countries still use the same Pension Funds Act No. 24 of 1956, with some deviations.
What is the Old Mutual SA Retirement Gauge?
The Retirement Gauge, which was launched in 2021, provides useful insights on the retirement savings habits and retirement readiness of South Africans belonging to umbrella funds through their employers’ occupational schemes. Based on actual data rather than a survey or interviews, Fairbairn Consult analysed almost half a million members of three large umbrella funds
representing retirement savings of over R138 billion. The analysis covered around 6 300 different schemes offered by a wide range of employers of different sizes and across all industries, making it a very representative analysis of South Africans saving for retirement.
What were the key findings of the Retirement Gauge?
The Retirement Gauge confirmed that employers with a mostly blue-collar workforce tend to favour provident funds, with most provident fund members (almost two-thirds) earning below R10 000 per month compared to only a third of pension fund members.
The analysis indicated that the normal retirement age (NRA) is 65 for about half of the members. Approximately a third of the members are in schemes with NRA of 60. The lower the NRA is, the more onerous is the task to save enough money to retire in a financially secure manner as there is less time to save and more time to be supported by a pension fund.
Retirement funds often incorporate risk benefits, covering individuals and their families in the event of death, disability and/or critical illness. Critical trade-offs need to be made between take-home pay, the cost of risk benefits and the amount allocated to retirement savings. The average net contribution to retirement savings for the retirement funds included in the Retirement Gauge analysis is 12.6% of pensionable salary for pension fund members and 10.8% for provident fund members.
A quarter of all members across pension and provident funds were found to be contributing at the recommended level of 15% or more. It was also noted that 4% of provident fund members and 2% of pension fund members are
taking advantage of the opportunity to contribute1 20% or more of their salary towards retirement.
How much retirement saving is enough?
Conventional wisdom suggests that a retirement fund member should aim to save enough to retire with a pension that is about 70% of their final pensionable salary. The Retirement Gauge authors, Old Mutual Corporate Consulting, believe that the easiest way of quantifying how much should be saved towards retirement is by looking at a multiple of your annual salary (i.e., savings divided by annual pensionable salary).
To achieve a pension that is equal to 70% of his final pensionable salary, a man retiring at the age of 65 and buying a guaranteed pension that will increase roughly in line with inflation will require a retirement benefit of approximately nine times annual salary. A woman will require an extra 8% of savings (i.e., a multiple of 9.7) for the same pension as she is likely to outlive a man of the same age. To afford to retire earlier than at 65, a higher multiple of salary is required and the time available to accumulate that multiple is shorter.
The type of annuity selected will also impact the salary multiple. For instance, a living annuity will need more capital as there is no guarantee attached to the pension that the member will receive for the rest of his/her life, and they will need to be cautious about the amount they draw as a pension to avoid running out of capital.
Are the Retirement Gauge members on track for a financially secure retirement?
The Retirement Gauge research indicates that average multiples for people of all ages are lagging where they should be. Average multiples build up to 2 to 3 times rather than the 9 to 9.7 times required at age 65. There are two main reasons for this:
▪ Inadequate contribution levels. The Retirement Gauge indicates that about two-thirds of provident fund members and a third of pension fund members are contributing less than 11% of their salary towards retirement savings. The analysis also clearly shows that those members contributing more are building up much higher multiples of their salaries.
▪ Preservation of savings when changing jobs. The analysis paints a disconcerting picture with respect to this. People who change jobs in their twenties cash out more than 90% of their savings. Interestingly, people changing jobs in their fifties still cash out around 50% of their retirement savings. This is surprising considering the relatively short period remaining before they reach their NRA.
The Retirement Gauge revealed that income level does not lead to better preparedness for retirement, at least not based on people’s savings within their current employer schemes. The levels of savings, relative to pensionable salary, are remarkably similar across all income bands.
An encouraging insight from the analysis is that people with long service with their employer do, on average, manage to build up healthy savings approaching the required 9 to 9.7 times. The average multiple for people with 35 years of membership in a retirement fund is eight. This reinforces the fact that preservation is key as these members are effectively ‘preserving’ their
savings for this extended period. Unfortunately, people with 35 years of service are very rare nowadays. In the analysis, approximately three-quarters of members had 10 years or less service with their current employer.
What can we learn from the Retirement Gauge?
The prospect of retiring one day is a daunting consideration from both a mental point of view and a financial perspective. Long-term planning, discipline and careful money management are critical in ensuring that we can save adequately for our future.
The Retirement Gauge noted that as many as 94% of South Africans face the prospect of having to make significant changes to their lifestyle to adjust to a lower level of income. Although a similar study has not been conducted for Namibia to confirm this, it is likely that our retirement outlook is also bleak given the:
▪ Relatively low population participation in retirement funds.
▪ Low rate of preservation of retirement savings benefits (approximately 75% of withdrawal benefits are paid to exiting retirement fund members in cash).
▪ Net contributions towards retirement savings that are lower than 15% of salary; and
▪ An average normal retirement age that is closer to 60 than to 65.
The good news is that it is never too late to start planning for your retirement. Consider taking some of the following proactive steps towards securing your financial future:
▪ Take an active interest in your retirement fund: understand the benefits offered by the fund, where your savings are invested and what the multiple is that you are on track to achieve at your NRA.
▪ Preserve your retirement savings when you move to a new employer.
▪ Source financial advice.
– Increase your contribution towards retirement savings (ideally contributions towards your retirement savings benefit should equal at least 15% of your salary).
– Consider how you may be able to delay your retirement to provide you with enough time to build up a sufficient level of retirement savings.
– Consider investing in growth assets (equity and property) for as long as possible. Growth assets significantly outperform cash and bond assets over the long term.
* Carmen Forster is Head of Production Development & Client Retention (Corporate Segment) at Old Mutual Namibia
