No signs of retirement crisis improving, says Alexander Forbes
Only 5.17% of people who retired from funds administered by Alexander Forbes this year are able to maintain their standard of living
There are no signs of SA’s retirement savings crisis abating, according to a study by Alexander Forbes, one of the country’s largest pension fund administrators.
In fact, the majority of employees face the possibility of running out of money just a short time into their golden years.
Only 5.17% of people who retired from funds administered by Alexander Forbes this year are able to maintain their standard of living. The pension fund administrator’s startling figures show people who have retired are, on average, able to get less than a third of what they used to earn — just 28.8%.
More than half actually got less than 20%. Most did not even buy a retirement annuity but took out their savings in cash to settle debt and other short-term financial pressures.
“We live in a country where retirement simply isn’t the number-one financial priority. We need to recognise that people are struggling. They are supporting wider family groups. These are South African realities,” said managing executive of research and product development at Alexander Forbes, Michael Prinsloo.
Most retirement fund administrators estimate that people need between 60% and 80% of their last salary to retire comfortably. This dire state of retirement outcomes in SA echoes earlier reports this year from global consultancy Schroders and 10X Investments. The Schroders survey shows that South Africans are significantly underestimating the proportion of income taken up by the cost of living at retirement. 10X’s survey shows that 41% of 11.9-million economically active South Africans have no retirement plan in place at all.
The Alexander Forbes figures are based on actual savings of more than 1-million workers from 2,030 employer funds. They represent roughly 10% of SA’s retirement funds’ membership. The average worker, at 37 years, only has R291,541 saved for retirement.
Sad state of affairs
A number of factors have contributed to this sad state of affairs. The number of people taking out their savings when changing jobs is increasing every year. SA’s average pensionable salaries have grown by only 4.2% since 2010, and have actually shrunk by 1.2% every year when inflation is taken to account. The average worker’s contribution to retirement savings sits at just 12.17% when administration and costs related to other benefits are deducted. And investment returns over the past few years have also made the situation worse.
“We are not earning enough returns at this stage to compensate for the salary growth … Investment returns are only [equal to] inflation when you look at the last three years. That’s why replacement ratios have actually not been growing, despite the fact that preservation is poor,” said Prinsloo.
A 28.8% net salary replacement ratio simply means that if one takes the median salary of R151,826 earned by tracked retirement fund members in 2018, a person who was earning R10,000 in pensionable salary a month is now getting R2,880 a month from their retirement annuity.
“We’ve won a few battles, lost a few battles, but we are not winning the war in terms of improving outcomes. We’ve gone backwards,” said Prinsloo.
He said low returns are primarily a function of low bond yields around the world. The disappointing investment returns have been a heated subject in retirement administration circles for a while now. The Government Employees Pension Fund is contemplating taking more of its members’ assets offshore in search of better returns.