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Retirement Provision Concerns

In an address to parliament on 4 September, the Minister of Finance expressed concern over the number of people resigning to get their hands on money in their pension and provident funds. The matter is so serious that it was also discussed at Cabinet level.

At the heart of the perceived increase in resignations, lie rumours that the government is taking steps to enforce preservation of retirement funds. These rumours no doubt have its origins in the proposed retirement reforms announced earlier which is currently being discussed with all affected parties, including business and the unions. Government also aims to improve communication to the masses in an effort to stifle further confusion.

The Minister admitted that he does not know all the underlying reasons for the spate of resignations, but believes that other factors, like over-indebtedness, also plays a role.

Low Savings and High Debt

The Minister pointed to the country’s household savings rate of 1.7% of GDP in 2013 as a great concern, and an indication that people are struggling to save.

Coupled with this are high levels of debt:

“Household debt as a percentage of disposable income rose from about 50 percent in the early 2000s to above 80 percent during the Global Financial Crisis. This ratio remains high at around 75 percent. Many of our people are overly-indebted and susceptible to income and price shocks.”

Part of the blame for this is placed on bad retail credit providers, “…especially that credit which is meant to fund short-term or excessive consumption and which does not meet the affordability test. What we, and Cabinet, are saying is that we do need to ensure that there is responsible lending and borrowing, and that there are robust regulatory checks and balances to protect workers, pensioners and the most vulnerable members of our society against reckless credit and unfair garnishee orders, as examples.”

Returning to retirement funding, the Minister concedes that there are deficiencies in the current set-up, particularly as far as provident funds are concerned when it comes to preservation. Others areas of concern include high charges and poor governance of pension funds.

“The reality, Madame Speaker, is that globally people are living longer, especially in retirement, because of medical technology and enhanced living standards. It is, therefore, imperative to assist people in making the right decisions while they are working and when they are about to retire. International research and behavioural economics provide overwhelming evidence of how the right defaults can assist people in making the right decisions. These are complex decisions to make since were are never certain how long we will live and how much we will need in our retirement.”

“We appeal also to financial services providers to give unbiased and accurate advice to their prospective clients, and not to take advantage of their fears. We appeal to trustees to inform and educate members of their funds of the facts surrounding retirement reforms. We appeal also to Government’s Human Resource departments at national, provincial and local level to provide employees with all the accurate information they need regarding these retirement reforms, and to also counsel employees on the dangers of excessive debt and cashing their retirement funds prematurely. Pamphlets and Circulars will soon be widely circulated to assist employers in communicating the correct message.”

Another issue in this matter concerns financial literacy, as confirmed in the latest results from the 2014 second quarter PPS Professionals Confidence Index (PCI) survey.

“The PPS survey, conducted among approximately 3 000 of SA’s graduate professionals, recorded a confidence level of just 38% when respondents were asked how confident they were that the general public in South Africa have a good understanding of financial matters such as budgeting, saving, retirement and insurance.”

“Macy Seperepere, Manager: Professional Associations at PPS, says the results of the survey echo widespread concerns about the low levels of financial literacy in the country, which is one of the contributing factors to the high level of debt and low retirement savings.”

“Education also has an important role to play in enhancing financial literacy,” says Seperepere. “These confidence levels are incredibly low and justify the low level of financial literacy, as this is where education about financial matters should begin,” she says.

The reference to the “right defaults” mentioned above, which are contained in the retirement reform proposals, should set the alarm bells ringing for the industry. Coupled with “salaried advisors”, these options may address the needs of the masses, but financial advisors will find a substantially reduced piece of the pie to contest for.

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