by Patrick Cairns
The latest Sanlam BENCHMARK Survey, which takes stock of the behaviour of members of South African pension funds, is full of scary statistics. What is perhaps even scarier is that few of them will surprise anyone intimate with this industry.
Whether it is apathy or a lack of knowledge, pension fund members continue to act in ways that jeopardise their financial well-being. This shows that there remains a huge challenge for the financial services industry to find ways to engage these members so that they become more aware of the effects of their choices and more proactive in exercising them.
Unsurprisingly, the survey found that the biggest mistake fund members make is failing to preserve savings. Of those members who withdrew from a fund due to resignation or retrenchment, 77% took some or all of their benefit in cash.
Mayuri Reddy, marketing strategist at Sanlam Employee Benefits, said that what makes this worse is that many of these members don’t understand the implications of what they are doing.
“The survey results indicated that many people are not aware of the tax implications of non-preservation (49% of members surveyed), nor do they fully understand the impact on their retirement outcomes (45%),” she said. “Members must realise that dipping into their retirement savings – which they are effectively doing by not preserving – is like borrowing from their future selves, at a very high interest rate and with no intention of ever paying it back.”
Clearly there is a need for pension fund members to be better advised. Many rely on their human resources departments to guide them, but this is inadequate. It does show that there is an opportunity for financial planners to make themselves more prominent in this corporate space, being available to human resources departments and retirement fund members when they withdraw.
This is equally true at the other end of the process. There is a role for financial planners to play when any employee joins a pension fund, and it is an opportunity that is perhaps not being explored actively enough.
The survey found that only 5% of members admit to seeking financial advice more than 20 years before retirement. Of the pensioners surveyed, 67% indicated that they had first received advice within ten years of retirement and 20% first met with an adviser on their retirement date.
The potential implications of this are of course severe. The survey found that 43% of pensioners are still paying off debt in retirement and only 43% of them believe that they have enough capital to last for the rest of their lives.
The survey also found that of the 42% of members invested in their fund’s default portfolio, 70% said that they took that option because they trusted that the trustees would make sound investment choices. Yet 87% admitted that they had not voted for their trustees and 75% couldn’t name one.
The majority of members – 72% – also never revisited their initial decision regarding their retirement benefit options. Only two in ten were aware of what their fund’s stated target pension is, even though 60% of funds have this in place.
Only one third of female members indicated that they had considered that they would live longer than their male counterparts and what that would mean.
Another alarming statistic in the survey is that it found a dramatic increase in the number of pension fund members who have no other personal savings. For this year, 36% of members said that their pension fund is all they have, up from 25% last year and 21% in 2013.
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