Ideally, you should have a stable income to maintain your standard of living throughout your retirement. This is the gold standard for retirement.
However, since the South African retirement industry largely abandoned defined benefit (DB) funds in favour of defined contribution funds, this goal has been difficult to achieve.
In the living annuity space, for example, two separate analyses last year showed that South African retirees invested in living annuities risked running out of money, with many already living on half the income they enjoyed just six years prior. And, an analysis RisCura recently carried out for a large DC fund showed that only about 5% of members were on track to retire with a sufficient, stable income to maintain their standard of living throughout retirement.
While a number of factors are impacting the ability of trustees and their members to achieve this retirement goal, there are three main ones:
Disconnect between parts of the journey
In the era of DB funds, the member’s journey was seamless, starting when he or she began saving for retirement to when they drew their last breath. They contributed to their fund for approximately 35-40 years, after which their fund paid them an income until they no longer needed one. Simple.
Now, in the era of DC funds a disconnect has arisen and there is no longer a seamless transition between saving for retirement and drawing a retirement income for the rest of your life. Instead, trustees and members focus on building up capital, and view a retirement date as the end of one journey, and the years in retirement as another, separate journey. This mindset has a huge influence on the investments that are selected for a retirement savings portfolio and will determine whether or not members have enough income to maintain their standard of living throughout their retirement.
Too much choice during the disconnected journey
From 2013 to 2016, in anticipation of the Default Regulations that National Treasury was considering, the Sanlam Benchmark Survey asked trustees which annuity they thought would be more appropriate for an ‘average’ member of their fund. Their responses varied greatly over the four years, indicating what many researchers have known for years: too much choice is confusing.
It can also be paralysing, as borne out by the recently launched 2018 Sanlam Benchmark Survey that shows that in 2017 only 22% of respondents said their fund had done something about implementing an appropriate annuity product for their members. About 50% had done nothing, and the rest were still trying to do something. Hopefully this number increases in light of the Default Regulations that must be in place by March 2019.
Expensive products shorten the journey
To exacerbate the situation, high fees after retirement will ensure that your retirement income runs out of road long before you do.
As many trustees know, but alas not many retirees understand, withdrawing too much from a living annuity – the most popular post retirement vehicle – can dramatically impact the ability of your capital to give you an income for as long as you need one. Most analysts agree that investment returns over the next 10 years are likely to be low, and that if you’re getting 4% above inflation you’re doing well.
Figures from the Association for Savings and Investment South Africa (ASISA) show that, depending on the returns the investments in your living annuity produce (after all fees), drawing down 7.5% of capital per year (according the ASISA the average drawdown rate in 2017 was 6.6%) could see your income start to reduce after only 13 years in a low return environment.
Then, if you look at the impact a difference in fees can make it shows that paying 2.5% extra in fees, shortens this journey from 13 to 10 years.
How can trustees and their advisers help?
There are several ways that trustees can help members to ensure that the Cradle-to-Grave retirement journey is a seamless one for their members. For example:
- Think long-term when constructing investment strategies. Consider whether your investment strategy focuses on protecting a pension income in the long-term or protecting pension capital in the short-term? Take care not to be myopic.
- Select a trustee endorsed annuity option that seamlessly aligns with your investment strategy. Take care not to offer too many choices.
- Communicating simply will help to make better informed decisions. Members do not pay attention to complex information that they do not understand. As a result, members are not saving enough.