About 70% of the population  aged more than 85 are women. Picture: INGANATHI WILLIAMS
About 70% of the population aged more than 85 are women. Picture: INGANATHI WILLIAMS

Startling new estimates show that about 59 000 people - more than 20% of all retirees drawing a pension from the favoured South African pension product, the living annuity - are now drawing half the income they were receiving six years ago in after-inflation terms.

The estimates are the work of Deane Moore, an actuary and CEO of Just South Africa, a company that provides retirees' least-favoured choice of pension - the annuities that guarantee your income.

However, the Association for Savings and Investment South Africa, which represents life and investment companies that provide living annuities, has labelled Moore's estimates "dangerous".

Nine out of 10 retirement fund members choose to invest their retirement savings from an employer-sponsored retirement fund or retirement annuity in investment-linked living annuities at retirement.

These pension products allow you to choose the underlying investments, but you take the investment risk and the risk that you may outlive your savings' ability to provide an income.

Each year, Asisa publishes the average rate at which pensioners are drawing an income from the R330-billion invested in living annuities - this year the average rate was 6.62% of the capital a year as a pension.

Gloomy figures

But Asisa's rates fail to show how many retirees are drawing dangerously high percentages of their capital or who have hit the maximum rate at which a pension can be drawn - 17.5%. Once you hit the maximum, your income declines in real (after-inflation) terms each year.

The most recent details from 2011 were published in a 2012 Treasury discussion document titled "Enabling a Better Income in Retirement".

Moore used these figures to calculate the likely rate at which those who were on pension in 2011 are now drawing an income from their living annuity investments.

He found that:

An estimated 50% of the 2011 retirees - about 139 000 people - will probably see their income decline in real terms within the next five years unless they earn relatively high returns of more than 12.5% a year (before fees) over this period;

The 69 500 clients who were drawing more than 12.5% of their capital as a pension in 2011 will have reached the maximum drawdown limit of 17.5% if they earned returns in line with retirement fund averages and increased their pensions in line with inflation.

They would also have drawn from their capital, rather than just the returns, over the past six years;

About 59 000 of these investors have seen the rand value of their income halved in real (after-inflation) terms over that period, and the other 10 500 have seen the rand value of their income reduced by 33% in real terms; and

About 22 600 retirees who had been drawing between 10% and 12.5% in 2011 would also have reached the maximum drawdown rate of 17.5% if they took inflation-linked increases in their pensions over the past six years.

Graphic: RUBY-GAY MARTIN
Graphic: RUBY-GAY MARTIN

Crisis still not clear

Taryn Hirsch, a senior adviser at Asisa, says life and investment companies that offer living annuities only provide the industry body with data about the total policies on their books and do not provide data about individual policyholders.

Asisa aggregates this data to determine the average drawdown rates. Hirsch says the detailed 2011 data was provided to the Treasury at its request.

It is not possible to extract deeper trends from the pooled data and it would be misleading to say retirees are heading for disaster, Hirsch says.

She points out that:

Living annuity policyholders may well have more than one living annuity;

Policyholders who have several living annuity policies use them for different funding purposes;

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Retirees can on death bequeath their remaining investments to beneficiaries. Younger beneficiaries who inherit policies may draw down the maximum income;

Terminally ill policyholders may withdraw the maximum income;

Policyholders may place their retirement fund capital in living annuities with a view to buying conventional annuities at a time when conventional annuity rates are higher; and

Retirees may be invested in other retirement savings products.

But Moore says the "crisis of unsustainable retirement income" will become visible in the decade between 2020 to 2030 as more living annuitants start to live beyond their average life expectancy.

Women hit worse

In its 2012 document, the Treasury said its calculations suggest that the vast majority of South African living annuitants are exposed to a substantial risk of falls in real income as they age.

Financial advisers have highlighted the problems with living annuities at recent Financial Planning Institute events and a number of advisers have joined a new organisation, the South African Independent Financial Advisors' Association, which focused on living annuities at its first two meetings this year.

Moore says the crisis will affect women much more severely than men as 70% of the population over the age of 85 are women. The average life expectancy for those who retire at age 65 is 18 years for men and 22 years for women, with 50% of men and women living beyond these ages.

Gloomy figures

But Asisa's rates fail to show how many retirees are drawing dangerously high percentages of their capital or who have hit the maximum rate at which a pension can be drawn - 17.5%. Once you hit the maximum, your income declines in real (after-inflation) terms each year.

The most recent details from 2011 were published in a 2012 Treasury discussion document titled "Enabling a Better Income in Retirement".

Moore used these figures to calculate the likely rate at which those who were on pension in 2011 are now drawing an income from their living annuity investments.

He found that:

An estimated 50% of the 2011 retirees - about 139 000 people - will probably see their income decline in real terms within the next five years unless they earn relatively high returns of more than 12.5% a year (before fees) over this period;

The 69 500 clients who were drawing more than 12.5% of their capital as a pension in 2011 will have reached the maximum drawdown limit of 17.5% if they earned returns in line with retirement fund averages and increased their pensions in line with inflation.

They would also have drawn from their capital, rather than just the returns, over the past six years;

About 59 000 of these investors have seen the rand value of their income halved in real (after-inflation) terms over that period, and the other 10 500 have seen the rand value of their income reduced by 33% in real terms; and

About 22 600 retirees who had been drawing between 10% and 12.5% in 2011 would also have reached the maximum drawdown rate of 17.5% if they took inflation-linked increases in their pensions over the past six years.

Crisis still not clear

Taryn Hirsch, a senior adviser at Asisa, says life and investment companies that offer living annuities only provide the industry body with data about the total policies on their books and do not provide data about individual policyholders.

Asisa aggregates this data to determine the average drawdown rates. Hirsch says the detailed 2011 data was provided to the Treasury at its request.

It is not possible to extract deeper trends from the pooled data and it would be misleading to say retirees are heading for disaster, Hirsch says.

She points out that:

Living annuity policyholders may well have more than one living annuity;

Policyholders who have several living annuity policies use them for different funding purposes;

Retirees can on death bequeath their remaining investments to beneficiaries. Younger beneficiaries who inherit policies may draw down the maximum income;

Terminally ill policyholders may withdraw the maximum income;

Policyholders may place their retirement fund capital in living annuities with a view to buying conventional annuities at a time when conventional annuity rates are higher; and

Retirees may be invested in other retirement savings products.

But Moore says the "crisis of unsustainable retirement income" will become visible in the decade between 2020 to 2030 as more living annuitants start to live beyond their average life expectancy.

Women hit worse

In its 2012 document, the Treasury said its calculations suggest that the vast majority of South African living annuitants are exposed to a substantial risk of falls in real income as they age.

Financial advisers have highlighted the problems with living annuities at recent Financial Planning Institute events and a number of advisers have joined a new organisation, the South African Independent Financial Advisors' Association, which focused on living annuities at its first two meetings this year.

Moore says the crisis will affect women much more severely than men as 70% of the population over the age of 85 are women. The average life expectancy for those who retire at age 65 is 18 years for men and 22 years for women, with 50% of men and women living beyond these ages.


Only a small minority will be able to leave a legacy

Most retiring pension fund members choose to use an investment-linked living annuity to provide an income in retirement often because they believe they will leave a legacy for their children or heirs.

However, the myth that living annuities will enable you to leave a legacy should be bust, says Deane Moore, the CEO of Just South Africa.

It is only the 31% of living annuity investors who draw an income of less than 5% of their living annuity investments who have a high probability of leaving some legacy to beneficiaries, he says.

Everyone else should focus on preserving their income.

Most people shun guaranteed annuities, which provide a guaranteed income for life regardless of how long you live, because the remaining capital you invest remains with the life assurer when you die, or if you select a guaranteed period for which the income will be paid to you or your heirs, at the end of that period.

Earlier this year, Sygnia launched its ForLife living annuity, offering underlying investments in Just's Lifetime Income asset class. Investments in this asset class provide a guaranteed income for life that can never be reduced regardless of what happens in investment markets or how long you live, Moore says.

The initial income guaranteed depends on your health, lifestyle and income as it would if you were buying a separate guaranteed annuity policy.

Over your lifetime, the Lifetime Income Fund provides an annual return between equities and bonds, and the return increases the longer you live, Moore says.

You can split your living annuity investments between the Lifetime Income asset class to guarantee your essential expenses for life and other unit trust funds aimed at delivering long-term growth and potentially a legacy for your heirs.

Just is currently in discussions with other living annuity providers to get its new asset class listed on more investment platforms.

Pieter Koekemoer, head of personal investments at Coronation Fund Managers, says that Just's product is the most exciting development in the retirement fund industry to address the risk of longevity that asset managers cannot address with traditional investments.

At a recent Morningstar conference for financial advisers, Jaco van der Walt, the head of the FirstRand Investment Management Office, says living annuities are complex investment drawdown accounts that are dangerous tools in the hands of the uninformed.

He says they contain a huge amount of risk that retirees - especially less-affluent pensioners - are often unable to bear.

The only way of dealing with the risk to your income that you face in a living annuity if you live a long time is to take on higher investment risk, Van der Walt says.

However, many retirees do not have the ability to take that risk.

Van der Walt says that he is pleased to see guaranteed annuities being rolled up in living annuities and says advisers need to engage with product providers so that guaranteed annuities can be made more affordable.

This way, people can be offered real solutions to the problem of how to secure an income in retirement rather than being "sold dreams", he says.

David McCarthy, a South African actuary who worked on the National Treasury's income in retirement discussion document, says that a product that tries to offer some kind of compromise between the risk of outliving assets, leaving something to heirs, and investing in long-term higher-risk-return assets, is clearly welcome for retirees.

According to McCarthy you should always look for transparent, uncomplicated annuity products and make sure you can afford the fees.

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