by Piet Coetzer

Retirement planning

Small changes can make a big impact

Brian Spanier-Marson
Brian Spanier-Marson.JPG
The Afrikaans saying, Bietjie, bietjie, maak meer, is a great way of explaining the government’s approach to reforming the pension industry. Although large-scale reform of the retirement industry has been debated for many years and was expected by most South Africans, especially the retirement industry itself, it appears that government has chosen a piecemeal approach.

This is the view of Brian Spanier-Marson, CEO at Labhart Asset Consulting who has established the online service called Mr Retirement , who says that change of this sort should not be seen as a bad thing.

“Change, especially when it is made in incremental stages, enables the authorities to get the basics right on a ‘single issue basis’ without having to make multiple changes, which may get bogged down by debate and political interest,” he says.

With government looking at things holistically and slowly working towards an end goal in incremental steps, major positive changes will be achieved in the medium to long-term both for the pension industry and South Africans at large.

This approach keeps things agile and gives government the power to move as the market dictates, says Spanier-Marson.

The main issues already identified by the Treasury comprise inadequate lifetime savings, low levels of preservation and portability, high fees and charges, and low levels of annuitisation (deferred annuity from the accumulation phase to the payout phase of retirement savings).

In many ways, the South African retirement system is effective for employed individuals: “According to government’s statistics, retirement funds are the destination of more than half of household savings, and total retirement savings in South Africa ranks as the largest in the world relative to gross domestic product.

“However, despite high participation and contribution rates, only approximately 10% of South Africans are able to retire and maintain their pre-retirement standard of living. This dire reality puts strain on both the government and young adults, who inevitably become financially responsible for their elders, and in turn are unable to save for their own retirement.”

The main reason for this shortfall is the low level of preservation of retirement savings.

“Even though they are highly taxed when they withdraw their retirement savings early, many workers continue to cash-in their retirement savings when they leave an employer. Sanlam’s recently released 2012 Benchmark Survey, states that the average South African working person will change jobs between five and seven times.

“Left to their own devices, benefits will more than 80% of the time be withdrawn in cash and not saved for retirement,” says Spanier-Marson.

This not only wreaks havoc on retirement security for individuals, but it also tends to push up the costs associated with pension administration. Fund assets are held for a shorter period  and fixed costs have to be recouped over this comparatively brief period via higher annual or upfront fees.

“By enforcing the preservation of funds, the government will not only be assisting South Africans to accrue larger savings for retirement, but will also aid in reducing the comparatively high cost structures currently being charged locally,” he says.

The preservation requirement government plans to phase in still allows a certain amount of leeway to cash-strapped individuals. The requirement may be partially waived for those who are unemployed and have exhausted their Unemployment Insurance Fund benefits, or those who require funds for medical purposes. In these situations, the government has proposed that one-third of the total amount be accessible to the individual to tide them over.
Uniformity and simplification

Lack of uniformity of tax treatment and benefits of the various retirement funds (pension, provident and retirement annuity funds) are another major stumbling block that government proposes to tackle.

The introduction of one system for everybody will be a difficult but welcome reform, saving costs because administrators would not have to spend time keeping up with all the different complexities of each kind of fund.

The value of simplification also lies in the fact that it will lead to a better understanding of the system by members, demystification of the system and a higher level of enthusiasm to save for retirement.

The industry cannot deem its “work done” once its members have retired, but should rather be committed to providing a retirement income to each member even after they have retired.

“Many funds regard the end of their responsibility when their members reach the retirement age of 65. However the 2012 Benchmark Survey notes that if members survive until they are 65, they are likely to live for another 20 years, which means that they have a sufficiently long investment horizon to take a balanced approach to investments rather than an overly conservative approach,” says Spanier-Marson.

The danger of being overly conservative with retirement annuities is that there is a big possibility that members can outlive their savings. Their future investment horizon, at the date of retirement, is sufficiently long to outlive a prolonged investment cycle and deliver a return well above cash rates.

“By identifying and dealing with issues raised, I believe that together the government, the industry and working South Africans can bring about much-needed change that has the ability to drag us out of the retirement crisis that we currently face,” Spanier-Marson concludes.

(Article based on a a release supplied by Mr. Retirement)

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Issue 72