Picture: ISTOCK
Picture: ISTOCK

Most people have most of their savings in a retirement fund, but they can't access those savings even in an emergency.

Ideally, you should have your own savings set aside for emergencies - three times your monthly salary, financial advisers recommend - but more than 30% of South Africans don't have any emergency savings, according to the latest Old Mutual Savings Monitor.

And as South Africans are underinsured to the tune of trillions of rands and do not have much in the way of accessible savings, many of us are "one unfortunate incident away from poverty", independent actuary Rob Rusconi said at a recent Alexander Forbes presentation to trustees. Even those with good jobs have "enormous potential to fail".

For emergency cash, retirement fund members often borrow - incurring costly interest - turn to friends and family or, in dire cases, resign a job to cash in their pension or provident fund savings, according to last year's Sanlam Benchmark Survey of retirement fund members.

Now Alexander Forbes, SA's largest retirement fund administrator, has devised a model that it believes could stop members from taking drastic steps that ruin their finances. And one large employer in the retail and wholesale sector is trying it out.

In its latest Benefits Barometer, Alexander Forbes says the employer and its employees were contributing 14% of their salaries to the employer-sponsored fund. The administrator suggested reducing the retirement fund contributions to 10% and diverting 4% to emergency savings.

At a savings rate of 4% of salary, an employee earning R7,000 a month would save R10,800, or 1.5 times their monthly salary, by the end of the third year and R20,000, or close to three times their monthly salary, by the end of the fifth year. This is assuming no withdrawals and that the savings grow at about 9% a year.

Alexander Forbes then tested what withdrawals these savings could sustain and how employees could still ensure that their retirement savings delivered a reasonable percentage of their final salary as an income.

Michael Prinsloo, head of employee benefits consulting strategy at Alexander Forbes, said that to provide for these savings members would have to increase their contributions to the fund by two percentage points to 16% and then 18% as they got older, reaching a combined employer and employee contribution to the fund of 20% at age 50 and maintaining this until retirement at age 60.

Increases in contributions could be timed with salary increases to minimise the impact on take-home pay, and members - such as those who have their own emergency savings or those who need to make higher contributions to their retirement savings - can opt out of contributing to the emergency fund.

Viresh Maharaj, CEO of Sanlam Employee Benefits, said the model Alexander Forbes has proposed sounded good in principle as long as you stayed invested and saved for retirement at the predetermined higher contribution rates.

He said the biggest problem employees face is debt, and this should be addressed by debt counselling and financial literacy.

However, medical expenses, a lack of short-term insurance covering you when you lose an asset such as a car or a home, and disability are also reasons people need access to emergency savings, he said.

As part of its 2014 Benchmark Survey, Sanlam asked retirement fund members who had withdrawn their retirement savings what they did with the cash. About 44% used it to reduce short-term debt and 14% to reduce their home loans.

Elaine Wright, head of financial wellness at Momentum Corporate, said Momentum is busy with an offering for employers that will allow employees to contribute to a group emergency savings plan, but this will not take away from retirement savings.

Instead, Momentum is focusing on how to create more disposable income by rearranging employees' debt and helping them to budget effectively.

Nazia Kahlon, a specialist in group savings and investment at Allan Gray, said while savings for emergencies were an absolute necessity, taking these from retirement savings may not be the best idea.

Most South Africans' retirement savings are woefully inadequate and there are tax benefits to saving for retirement, so detracting from these savings may not be the most appropriate way to fund emergency savings.

Maharaj said that if you are on a marginal tax rate of 35%, contributing 10% of your salary to a retirement fund (that is tax deductible) and 4% of after-tax money to emergency savings, that is the equivalent of contributing 16.15% of pre-tax income.

Employers and their retirement funds will have to weigh up whether that is an efficient way of saving - if it stops people withdrawing their retirement savings then it could be worth it, he says.

The biggest problem employees face is debt and this should be addressed by debt counselling and financial literacy
Viresh Maharaj, CEO  of Sanlam Employee Benefits

Kahlon said one of the biggest problems was that less than 10% of retirement fund members preserved their benefits if they leave the fund before they retire.

Save more

People do, however, need to save more and a disciplined approach offered through a payroll deduction coupled with education about what constitutes an emergency and when to access those savings, was a good idea, she said.

Prinsloo said Alexander Forbes estimates that if the members of the fund drew 25% of the amount they saved in the emergency fund every five years, 47% of them would reach retirement with between two and three times their monthly salary. Those closer to retirement would have anything up to two times their monthly salary in their savings accounts at retirement.

Alexander Forbes also estimates that stepping up the rate of contribution to retirement savings would improve the percentage of their income that the employees would receive as a pension by between five and eight percentage points higher than what they would have received if they had continued to contribute the flat 14% of salary.

However, Kahlon said the 25% withdrawal every five years is probably optimistic. The figures would look very different if you withdrew 25% every three years, she said.

The employer that has adopted the Alexander Forbes savings model allows its employees to withdraw their savings for whatever purpose - they do not need to prove a financial crisis has arisen - but members have to apply for a withdrawal.

Rusconi said Alexander Forbes has deliberately forced employees to think about their decision to withdraw by not giving them access to their savings at an ATM.

Prinsloo said though the 20% contribution rate from ages 50 to 60 is high, Alexander Forbes believes it is manageable as some older retirement fund members who have not saved enough are contributing high percentages of their income.