Is there a solution to South Africa’s retirement underfunding problem?
Adapted from the presentation ‘Resolving South Africa’s underfunding problem for retirees’ by Lesley-Ann Morgan, Global Head of Defined Contributions & Retirement at Schroders in the UK, presented at the Sanlam Investments Institutional Insights conference in September 2017
South Africans are notorious for not saving enough for retirement
It’s a common mantra in South Africa: preservation, preservation, preservation. Many individuals do not preserve their retirement savings during their working lives, particularly when they change jobs. This is widely accepted as one of the major contributors to South Africans not having sufficient savings for retirement.
To find a workable post-retirement solution, we need to understand the needs, wants and risks
Investors’ needs and wants often pull in opposite directions. For this reason, it can be very challenging to find the appropriate solution, and it is certainly not a case of a ‘one-size-fits-all’ result. Before we get to a possible solution, we therefore first need to have a clear understanding of the needs, wants and risks involved, as shown in the table.
The wants and needs of South African retirees, and the key retirement risks
Source: Schroders UK, September 2017
Investment choices alone are never going to save the day – people need to be educated
Although good investment returns and well-structured portfolios can help make up some of the shortfall, people first and foremost have to recognise that saving is important. Currently, financial education tends to happen close to retirement, when investors must make important decisions. It should in fact happen when they take their first job – to ensure they grasp the basics while they’re young. Also, this education must include creating an awareness of the role of debt in saving for retirement.
Compulsory contributions can also help improve retirement outcomes, but there should be flexibility
The problem in South Africa with compulsory contributions is that those at the lower end of the income scale (a significant portion of the population) may not be able to contribute at all stages of their life. The ideal would therefore be to introduce compulsory contributions with an opt-out option, like in the UK. This means it’s compulsory to start saving, but investors can choose to opt out. This has been a popular choice and interestingly, opt-outs have been surprisingly low.
Different default funds for different groups, based on their needs and wants, are more feasible
Governments the world over, including South Africa, have stressed the need for a ‘default solution’ – if employees do not want to choose where to invest themselves, their savings will automatically be placed in the default fund. In South Africa, the most workable solution would probably be to have different default portfolios for different groups according to their post-retirement needs and wants. This will involve tweaking a diversified portfolio to provide certain ‘add-ons’ depending on the retiree’s basic wants and needs for guaranteed income and protection against risk. Those with extended families, for example, may require an annuity structure based on a benchmark that is different from someone whose target is providing for their projected life expectancy.
A range of default funds may not be the ideal solution, but it’s most appropriate for South Africa
In an ideal world, the answer to underfunding in retirement would be for investors to earn maximum returns before retirement age. This means getting people to take as much risk as possible when they are younger, allocating capital to non-traditional asset classes and perhaps even using leverage in the early pre-retirement years. However, the most workable solution for South Africa’s diverse population, would most likely be different defaults for different people, taking into account the different needs, wants, income and socio-economic status.