Get these things right for a comfortable retirement
More than 90% of pension fund members will have an average shortfall of eight times their annual pensionable salaries at retirement
South Africans continue to fail dismally to provide for their retirement, with the latest industry statistics on savings rates showing that on average members have eight times too little savings at retirement.
Only 6% are set to retire with a pension equal to 75% or more of their final salaries since most members typically do not have 12 times their average pensionable salary in savings at retirement, which would increase their chances of getting such a pension.
Instead, on average members have 3.7 times their annual pensionable salaries at retirement — an average shortfall of eight times, Vickie Lange, head of best practice at Alexander Forbes, says.
The latest survey of more than a million members included in the Alexander Forbes Member Watch Survey shows that on average members retire with savings capable of providing a pension equal to just over a quarter of their final salaries.
A big contributor to this dismal outcome is members’ failure to preserve their savings when they change jobs, are fired or retrenched.
Alexander Forbes’s statistics show just 8.8% of members who leave their retirement funds are preserving their savings in either their existing or a new employers’ pension fund, a retirement annuity or preservation fund.
And they are on average preserving less than half of the money in their funds.
Both the number of members who are preserving their savings and the amount they are preserving has fallen since 2012, despite new regulations introduced in 2019 that attempt to nudge members to preserve their savings by making preservation the default option when a member leaves a fund.
Lange said it is too early to measure the effect of these regulations and the factors that contribute to poor pension rates in retirement are all being exacerbated by the Covid-19 pandemic.
A lack of preservation is the biggest culprit, but members are also saving too little and retiring too early.
Alexander Forbes found the biggest reason members are withdrawing their savings is because they believe the amounts are too low to warrant the trouble of preserving them. The retirement administrator found that 61% of members who failed to preserve drew out amounts below R25,000.
KEY NUMBERS YOU NEED TO KNOW
17% — the minimum amount you need to contribute over a 40-year period to achieve a pension of at least 75% of your final salary.
6% — the percentage of retirement fund members who can expect a pension of at least 75% of final salary.
14.5% — the percentage of retirement fund members who achieved a pension of more than 60% of their final salary.
12.22 times your pensionable salary at retirement — what you need to have saved to have a good chance of getting a pension of 75% of your final salary.
Many members fail to understand that smaller amounts saved earlier in your working life can make a huge difference later in life thanks to compounding growth, which is key to ensuring you have enough, Lange notes.
Alexander Forbes says you and your employer should be contributing 17% of your earnings for 40 years to ensure you have a pension equal to 75% of your final salary.
But the administrator found that on average members and employers are contributing a total of just 12% after the cost of group life benefits is deducted.
Pension targets are typically well below 100% of your final earnings as you are expected to have repaid your home, to have grown-up, financially independent children and no expenses for commuting to work.
But Alexander Forbes found most members are on target for a pension of just 40% of their final earnings. Failing to preserve when changing jobs means they do not even realise this target.
Another key to achieving a good pension is earning an inflation-beating return, but these have been difficult to find lately.
Retirement savers with many years to go to retirement are often encouraged to invest in funds that target returns that are five, six or even seven percentage points above inflation — that is 9%- 12% when inflation is 5% a year as it has been for the past decade.
Over very long periods, funds have been able to deliver these returns but recently have failed to do so. Even over the past seven years, funds are failing to meet these targets, Alexander Forbes’s Large Manager Watch survey to the end of April shows.
The average annual returns of 29 managers with a five-year track record to the end of April shows that none of the managers got even close to CPI + 5% and only six beat inflation.
The average annual returns of the managers in the Large Manager Watch over seven years to the end of April shows that more managed to beat inflation, but still only one out of 22 beat inflation plus 5%.
While conservative funds may look like a better option when markets are volatile, you would be shooting yourself in the foot if you're looking to achieve a higher target of inflation plus 5%.Thabisile Simelane, an investment consultant with Old Mutual
It has been a tough period, says Thabisile Simelane, an investment consultant with Old Mutual. But this should lead you to believe that inflation-targeting is broken or that you should change the goalposts, she says.
Addressing a webinar for members of Batseta, the body for retirement fund members and principal offices, Simelane said you should be aware that there are periods — even long ones like the current one — during which inflation-targeting funds fail to meet their targets.
We should have expected this period when funds failed their targets because it was preceded by a long period during which funds typically exceeded these targets by large margins, Simelane says.
Simelane looked back over the past 95 years to 1925 using a typical static allocation to the different asset classes required to achieve inflation plus 5%-7% and the returns of indices for each asset class. She found there were many periods where the returns were nowhere near even these inflation-plus targets.
In fact, only 70% of the time over the past 95 years has a portfolio designed to achieve inflation plus five delivered this average return over a seven-year period, Simelane’s research shows. And in only 49% of the rolling seven-year periods over the past 95 years did a more aggressive asset allocation achieve inflation plus 7%.
This gives you an idea of the frequency of the success rate, but not the quantum of the success rate, Simelane says.
During times when the funds do outperform the target, however, investors will bank that excess to make up for periods when the funds miss their targets, she says.
Investors closer to retirement often prefer more conservative multi-asset funds with less volatility that target inflation plus 1%, 2% or 3%.
Simelane says a strategic allocation in a conservative fund delivering returns for the asset classes in line with the relevant indices would have achieved its target of inflation plus 3% for only 50% of all the three-year periods over the past 95 years.
While conservative funds may look like a better option when markets are volatile, you would be shooting yourself in the foot if you attempted to use one of these funds to achieve a higher target of inflation plus 5%, Simelane says.
Over seven-year periods, these funds achieved inflation plus 5% only 32% of the time and inflation plus 7% only 15% of the time, her research shows.
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