Children’s education is now the top motivation to save for most South Africans in formal employment, while saving for retirement has fallen to third place after saving for an emergency.
This is one of the findings of the Old Mutual Retirement Monitor 2011, which surveyed the attitudes of more than 1 000 retirement fund members, non-members and pensioners between the ages of 18 and 64 in metropolitan areas.
The survey confirms research (published in Personal Finance last week) by financial services company Alexander Forbes that concludes that, in your initial years of employment, you could prioritise paying for assets, such as a house, and your children’s education over saving for retirement, which could be left until later in life.
Alexander Forbes suggests that, in the light of its research, current and proposed contribution limits for tax-incentivised retirement-savings vehicles should be reconsidered. People should be given greater incentives to save more of their income for retirement later in their economic life cycle.
Hugh Hacking, the head of retirement fund solutions at Old Mutual Corporate, says a number of factors have contributed to retirement dropping down the list of saving priorities since the previous Old Mutual Retirement Monitor. These factors include:
* People ask themselves: “Why should I save for retirement when I live a miserable existence now, struggling to make ends meet?”
* People prioritise their children’s education in the hope that it will put their children in a better financial position, and will be able to save for their retirement.
* Many people do not believe they will live long enough to enjoy the fruits of their retirement savings. Thirty-one percent of respondents who earn less than R3 000 a month doubt they will reach retirement age, whereas only 13 percent of respondents who earn R40 000 a month have the same doubt.
This is possibly the reason that 58 percent of respondents who earn less than R3 000 a month feel that death, funeral and disability cover is more important to them and their families than retirement savings, Hacking says.
The survey shows that the motivations for saving vary significantly according to lifestage and income.
There is a bias towards saving for children’s education among respondents aged 35 to 49, whereas those over the age of 50 favour saving for retirement.
However, only 54 percent of people who are less than 10 years away from retirement are actually saving for retirement.
Among younger respondents, retirement competes with acquiring assets, such as a car or a home, as a motivation to save. As consumers move into middle age, the motivation that competes with retirement is their children’s education.
Hacking says it is possible that some respondents regard their children as a substitute retirement policy: they intend to depend on their children for financial support during their retirement. This attitude may, to a certain extent, influence the tendency by a large percentage of the respondents to prioritise saving for their children’s education.
In cultures where financial dependence on one’s children in old age is the norm, investing in children’s education could be a wise decision, particularly if it ensures that the children will earn a high income once they enter employment, Hacking says. This attitude presents the financial services industry with a challenge in terms of the focus it places on education savings, as well as the way in which it tailors the financial advice it provides to families who have differing views on how paying for education and providing for retirement are linked, Hacking says.
As would be expected, saving for retirement becomes the top priority once people enter the older age brackets, the survey found.
The importance of providing for death or funeral expenses is evident among lower-income respondents, and it is against this motivation, primarily, that the need to save for retirement competes.
FUND MEMBERS HAVE MORE DIVERSE INVESTMENTS
Members of retirement funds hold a significantly broader range of savings and investment policies than people who do not belong to a retirement fund, the latest Old Mutual Retirement Monitor has found.
This may be because these products are “cross-sold” to fund members with their retirement benefits, Hugh Hacking,the head of retirement fund solutions at Old Mutual Corporate, says.
Another possible reason is that typically middle-income fund members are more likely to hold a broader spectrum of financial products than generally lower-income non-members, he says.
Retirement fund members are significantly more likely than non-members to belong to a medical scheme. Hacking says this is probably because fund members’ employers provide this benefit.
MEMBERS’ LACK OF KNOWLEDGE, ATTITUDES ARE WORRYING
The latest Old Mutual Retirement Monitor reveals a number of attitudes and expectations that should be of concern to retirement fund trustees, product providers and legislators, Hugh Hacking says. The areas of concern include:
Gaps in knowledge
Retirement fund members’ lack of knowledge about their funds is extensive, the survey found. The gaps include:
* Most members do not know how much they have saved for retirement. Only 23 percent of respondents can provide the approximate rand value of their retirement savings with any certainty. Respondents who earn more are more likely to know how much they have saved.
* Most members do not know where their money is invested or who manages their money. Only 36 percent of fund members know who manages the investments in their retirement fund and only 33 percent know where these funds are invested.
For many people their retirement fund deductions might simply be a hole they don’t understand into which a portion of their earnings disappears, Hacking says.
Despite members’ apparent lack of involvement in their funds, the survey found that members have a high level of trust in their trustees to look after their savings properly.
* Most members seldom understand communication from their retirement funds.
Hacking says the effectiveness of fund communication with members still leaves much to be desired, with respondents giving fund communication an average rating of 6.4 on a scale of one to 10.
“Pockets of dissatisfaction are clearly evident as regards communication frequency, with more than a third of members feeling that communication should be more frequent and one-third finding communications difficult to understand.
“Given these understandability problems, a significant proportion of fund members express a preference for an alternative to printed material as a form of communication, with one-on-one or face-to-face sessions particularly favoured.
“Most respondents say that the communication they receive tends to focus on the basics, such as fund rules and risk benefits, rather than important issues surrounding adequacy and investment choice,” Hacking says.
Fund trustees and employers need to place a greater emphasis on educating employees about all the advantages of saving for retirement, including the fact that it is not only about financial security in retirement but also things such as the creation of inter-generational wealth, he says.
False expectations
About 58 percent of respondents (44 percent of retirement fund members and 72 percent of non-members) say they intend to continue working after they have formally retired, and the “vast majority acknowledge that this will be due to financial necessity rather than choice”, the survey found.
On average, fund members expect that their retirement fund savings will provide them with 64 percent of their income in retirement, which indicates a heavier reliance on formal retirement savings than on alternative savings sources, Hacking says.
Among fund members, the percentage of their required income that they expect their pension to provide is inversely correlated with their current income levels, Hacking says. In other words, there is a tendency for wealthier retirees to expect to call on more investment sources for an income during retirement (most notably, retirement annuities).
Most people who do not belong to a retirement fund continue to look to cash savings to get them through retirement, but there appears to be a growing anticipation that they will have to rely on a state pension and/or a post-retirement job, Hacking says.
Respondents’ level of satisfaction about the current state of their retirement provision is “mediocre” at 5.8 on a scale of one to 10. But the level of satisfaction is “significantly higher among fund members (6.6) than non-members (4.9) regardless of income level”, Hacking says.
Retirement fund members are, obviously, more satisfied than non-members with the provisions that they have in place for their retirement and find the prospect of retirement less daunting than non-fund members, but the difference is not great, he says.
The relatively small difference in retirement provision satisfaction levels is surprising and somewhat alarming, Hacking says.
“It not only suggests that non-members have a poor understanding of the need for adequate retirement saving, but also that members either lack awareness of their fund benefits or realise that their benefits are still inadequate in terms of providing them with the income replacement ratio they require on retirement.
“A further important implication of the finding is the obvious need that exists for auxiliary retirement savings, regardless of retirement fund membership status. This needs to include a greater focus on education around retirement requirements and basic ‘rules of thumb’ regarding retirement adequacy ratios, as well as the provision of appropriate retirement savings vehicles to suit individuals from all income brackets,” Hacking says.
Preservation is rare
Retirement fund members seldom preserve their savings when they change jobs, particularly if they were retrenched or fired, the survey found.
The level of savings preservation depends on personal circumstances and the reasons for changing jobs, Hacking says.
Of respondents who left their previous employment voluntarily, about 48 percent took all or some of their retirement benefit in cash. The percentage rose to 56 percent among respondents who were forced to leave their jobs for reasons such as dismissal or retrenchment.
Only nine percent of respondents who left or changed employment due to dismissal or retrenchment put their retirement savings in a preservation plan, while only one percent of respondents who left their jobs voluntarily did so.
Hacking says a troubling fact is that more than half the working population is employed in small businesses. Because small companies have a high failure rate, most people will change jobs often and in doing so very few of them will preserve their retirement savings along the way.
It is quite clear that retirement fund members will preserve their retirement savings only if legislation forces them to do so, Hacking says. However, there should not be a blanket ban on pre-retirement fund withdrawals.
“Retirement fund members should be allowed to draw down a percentage of their last salary in a life crisis. This is a better option than being allowed all or nothing,” he says.
Pensioners feeling the pinch
Pensioners’ average rating of their level of satisfaction with the financial provision they have made for retirement is “a fairly respectable 6.95 out of 10”, Hacking says.
However, he says, there is strong evidence that pension adequacy is under pressure.
“The vast majority of pensioners surveyed report a drop in their standards of living after retirement. Many also point to this situation worsening as they advance in their retirement years,” Hacking says.