About 51 percent of pensioners saved too little while they were members of retirement funds and/or retired too early, and now cannot make ends meet. They are rapidly drawing on their savings to survive while facing ever-increasing costs of living.
And 78 percent are not satisfied with their income.
The deteriorating position of pensioners is highlighted in the latest annual Sanlam Benchmark Survey on retirement.
Of the 223 pensioners questioned on how much they receive as a pension, about 11 percent said they receive between R1 000 and R3 000 a month; 35 percent between R3 000 and R6 000; 30 percent between R6 000 and R10 000; 17 percent between R10 000 and R20 000; and the balance of seven percent receive more than R20 000 a month.
Dawie de Villiers, chief executive of Sanlam Employee Benefits, says that it is “a sad reality that many South Africans are heading for and experiencing poverty in retirement”. He says the core of the problem is the high level of debt in South African households, which leaves little left to put away for retirement, as well as the use of retirement savings to pay off debt.
Pensioners are also caught in the trap of low interest rates and increasing costs, particularly for health care and administered prices such as petrol, electricity and property rates.
And research released by Alexander Forbes this week shows that matters may only get worse for pensioners (see “Index continues its slide”, above).
The Sanlam survey shows that, in 2010, 30 percent of pensioners were unable to make ends meet. This figure went up slightly to 33 percent in 2011 before making the big leap to 51 percent last year.
The situation is likely to get worse, as half of the pensioners surveyed are under the age of 65.
To make up for the shortfall, pensioners are: cutting back on all non-essential spending (85 percent); digging into savings (27 percent); depending on friends and relatives to assist them (21 percent); cancelling private medical scheme membership (six percent); selling personal possessions (five percent); and selling their homes (five percent). The figures exceed 100 percent because many people are taking more than one measure to overcome their cash shortage.
Three percent of pensioners say they are living frugally and often go hungry. This is up from zero last year.
Those pensioners managing to save money from their income dropped from 53.6 percent in 2011 to 39.4 percent last year.
This year, the Sanlam survey carries the sub-title “When one day becomes day one”, reflecting how many people realise only near to or on retirement day that they should have planned earlier for retirement.
And despite the warnings, most employed South Africans who are members of occupational retirement funds continue to save too little, and/or fail to save for long enough, and/or retire too early, with the prospect of destitution at some stage in retirement.
The survey found that, among active retirement fund members:
* The average total contribution to retirement savings this year is 11.98 percent of pensionable income, which is down from last year’s 12.4 percent. De Villiers says that retirement fund contributions of 11.98 percent would translate into an anticipated lump sum of 9.7 times your final salary after 40 years, assuming there were no withdrawals along the way. This would provide a pension equal to only 57 percent of your final salary.
* De Villiers says that to get to a pension equal to about 75 percent of your final pay cheque, you need to save 14.6 percent (from both employer and employee) for 40 years and receive investment returns of 5.5 percentage points above inflation.
* The average period of saving for retirement has improved from 25 years to 28 years. Most retirement funds aim at giving you 75 percent of your last pay cheque after 40 to 45 years of membership of a fund.
* The average age of retirement is 59, which is one year up from 2012 but well below the 65-plus now being set as the retirement age in many developed countries that pay pensions to their citizens. The reason for raising the age of retirement is that people are living longer and need more money for retirement.
* Of the 20 percent of pensioners who withdrew savings from a retirement fund while still working, 49 percent did not preserve their savings for retirement, withdrawing all the money in cash. Only 30 percent of those who withdrew their retirement savings before retirement preserved part or all of their money in another retirement saving vehicle.
FAST FACTS
Lump sums
Most pensioners taking lump sums at retirement, whether up to one third from a pension fund or the entire amount from a provident fund, deplete the money within three years of retirement.
Of those who withdrew lump sums, 72 percent partially or fully reinvested the money.
Some 55 percent of pensioners who took lump sums used all or part of the money to pay off debt, mainly home loans, while 40 percent used the money to make home improvements.
A generous 10 percent gave money to family, while five percent thought travel was a good way to spend some of the money they received.
Pension choice
A quarter of all pensioners surveyed by Sanlam do not know what type of annuity (pension) they receive.
The most popular pensions are guaranteed level annuities (24 percent in 2012, up from 15 percent in 2011); inflation-linked annuities (24 percent in 2012, up from 22 percent in 2011); and guaranteed annuities that increase at a predetermined amount each year (19 percent in 2012, down from 23 percent in 2011).
While level annuities initially pay more than annuities in which your pension increases each year, they fast lose buying power, which declines in line with inflation, currently averaging about six percent year-on-year.
The least popular annuity is a with-profit guaranteed annuity, where increases are dependent on investment returns. Only 2.4 percent of pensioners bought these pensions last year, down from 10 percent in 2011.
Investment-linked living annuities (illas), where pensioners choose the underlying investments and how much to draw as a pension each year, account for only eight percent of pensions bought last year. This figure is significantly different from government and other industry figures, which show that about 90 percent of pensioners opt for living annuities. However, these figures would exclude pensioners who belong to funds, particularly defined-benefit funds, that provide a pension.
About 35 percent of illa pensioners say they selected the product because they want what remains of their capital to go to their beneficiaries.
Health care
In the survey, 80 percent of the pensioners said they contributed to a medical scheme before retirement, but only 48 percent are contributing in their retirement.
One of the reasons for the fall off in membership is that, according to retirement fund principal officers surveyed, only five percent of employers offer some kind of post-retirement medical scheme contribution subsidy, and mostly only to members who joined a medical scheme before a certain date.
Only 47 percent of retirees took into account when planning their retirement that medical scheme contributions, one of their top three expenditure items, could increase by between 10 and 15 percent a year.
About 30 percent of currently employed retirement fund members surveyed say they are saving separately for healthcare costs in their retirement.
Just over half (51 percent) of the pensioners surveyed manage to cover all their medical costs from their pension. Almost 16 percent say they manage to cover only their medical scheme contributions but not additional costs; 17 percent say they go without medical treatment they cannot afford; 20 percent say they withdraw money from other savings to pay for medical treatment; and 15 percent rely on friends and family to help pay medical bills. Almost 61 percent of the pensioners also rely on free government medical facilities.
INDEX CONTINUES ITS SLIDE
You need to save more than you planned to do if you want to have a financially secure retirement, because of interest rates and investment market expectations.
The latest Alexander Forbes Pensions Index, which since 2002 has tracked changes in projected retirement income of a typical member of a defined-contribution fund, continues on a downward trend.
John Anderson, managing director of research and product development at Alexander Forbes, says the index shows that members of defined-contribution funds continue to face significantly lower projected retirement benefits than what was expected at the start of 2002.
The index tracks three savers, born on January 1, 1972; January 1, 1962; and January 1, 1952. On January 1, 2002, they were 30, 40 and 50 years old respectively and all expected to be on track to have a pension that replaced 75 percent of their pre-tax salaries when they retired at age 65. So each saver’s index value was 75 in January 2002.
Now the person born in 1972 can expect a replacement rate of only 30 percent, the person born in 1962 a replacement rate of 37.9 percent and the person born in 1952 a replacement rate of 62.2 percent. The reason is the decline in bond yields and the resulting low returns expected in the future.
Anderson says the markets have affected the index in the following ways:
* Lower bond yields can signal lower future investment returns, reducing the amount you can expect to have when you retire; and
* The lower real (after-inflation) returns in the various asset classes have resulted in a significant increase in the cost of a pension you can buy at retirement.
(See link to “Pension graph”)