You must take care of own savings

old-age policy shifts onus to member

Nerique Nieuwoudt, head of strategy formulation at Novare Actuaries and Consultants says the biggest risk members of pension funds face is retiring with insufficient savings.
Nerique Nieuwoudt.JPG

The biggest risk members of pension funds face is retiring with insufficient savings to meet their needs.

Nerique Nieuwoudt, head of strategy formulation at Novare Actuaries & Consultants, explained: “Given the shift over the last decade from defined benefit funds to defined contribution funds, members are now responsible for their own retirement savings and are becoming more aware of the risks involved.

“The greatest risk for a member of a defined contribution (DC) fund is that their retirement savings are insufficient to meet their needs, or to maintain their lifestyle post-retirement.

“One way of measuring the adequacy of current retirement savings is by looking at the net replacement ratio (NRR), which is the member’s projected pension at retirement expressed as a percentage of his or her projected salary at retirement.”

She explained that members of DC funds build up a pool of savings over their working lifetimes.

The sum at retirement is determined mainly by the level of contributions to the fund, the return earned on those contributions, and the term of the investment.

The longer a member contributes, the larger the savings pool will be.

“Most members will not receive a pension that matches their salary or standard of living before they retire.

"In South Africa we have a very low savings rate, which means that most people do not save enough or contribute enough to their retirement funds.

"Another behavioral aspect is that many members take their retirement savings as a lump sum when they switch jobs, and do not preserve the savings they have built up,” said Nieuwoudt.

However, she added that experts agree members do not necessarily need 100% of salary as a pension when they retire, and are able to retire comfortably with a NRR of around 67% to 75%.

Once retired, members’ living expenses should be lower, debts are generally paid off and they have fewer or no dependents to provide for.

That said, members should strive to maximise their net replacement ratio, which can be achieved by reviewing contribution levels, how the funds are invested, and the investment horizon.

Members will be better off and achieve a higher NRR if they start to save from a young age.

Those who only start saving 10 years from retirement will find it almost impossible to receive a pension that is close to their pre-retirement salary.

Said Ms Nieuwoudt: “The investment return earned over the working lifetime is also important. Trustees need to select the correct investment strategy, ensuring young members are invested in growth assets for the majority of their time horizon, and that older members closer to retirement have some form of capital protection embedded in the investments.”

Fund members can also improve their NRR by saving more for retirement.

“It is never too late to start saving for retirement, or improving retirement benefits by reviewing investment options and the level of savings.

"As the industry evolves, members will play a greater role in choosing their investments, selecting how much to contribute towards their plans, and in deciding when to retire – all of which will determine how much money they will retire with,” said Nieuwoudt.

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Issue 72