It is becoming increasingly more important for consultants in the industry to start taking the lead and assist employers with the design of their employee benefits offering to employees. The reality is that it’s not enough for employers to provide a retirement fund only as part of the employee benefits offering. There is a lot more to consider, especially as the vast majority of the South African workforce does not have any other savings for retirement outside of their work arrangement. Decent employee benefits offerings will assist employers to attract and maintain the right caliber staff to help the employer to grow and expand and ultimately create jobs in South Africa.
Most employers believe that offering a retirement fund, group life cover and income disability cover is enough to look after the needs of their employees. Funeral cover, capital disability and critical illness cover is often overlooked. It’s important to team up with a team of expert consultants to help your business to adapt to changes and help you to drive your business forward with innovative strategies that enhance your business objectives.
Let us focus on the retirement fund and the considerations with past and future legislative changes on the horizon.
The retirement fund’s design should achieve a few objectives which include but is not limited to having the correct default investment strategy in place to accommodate members pre- and post-retirement and with the default annuity options available to members.
Following the implementation of the Two-pot system, members will have a smaller, though a guaranteed, capital amount available to secure an income for the retirement years. Education is crucial for members to understand that the value that will be in the retirement pot will only be two-thirds of the potential benefit at retirement. The impact of withdrawing the savings pot annually needs to be illustrated in a way that members will see that though it serves an immediate need when the withdrawal is made, the opportunity cost is much greater when you need to provide for an income when you no longer actively participate in the workforce.
To illustrate our thoughts, we looked at the data of approximately 47 000 provident fund members and modelled the impact of the two-pot system on the amount of money members would have in their retirement component which they would then buy an annuity with at retirement.
From this data we have selected members at ages in 5-year intervals from age 20 to age 55 and projected their current benefits in 5-year intervals from 5 years to 20 years. The persons currently aged 55 and over were excluded from the projections as they do not have to participate in the two-pot system.
The ultimate effect of the two-pot system will be that members would reach retirement with at least two-thirds of their lifetime retirement savings in-tact and usable to provide a retirement income. Looking at the retirement component (as defined in the two-pot system) as a percentage of the overall total fund value for members at these ages changes as follows over these projection periods we see the below progression based on our data, assuming 15.6% contribution rate, salaries increasing at an inflationary rate of 5% per annum and a balanced portfolio return of CPI + 5% per annum.
From the table above it is evident that only members under age 30 currently will likely achieve the 2/3rds level (or close to it) of total savings when they reach retirement age. Although the two-pot system will not be an immediate fix on retirement outcomes, over time this will then shift the reliance of individuals on government subsidy in retirement and increasing the number of individuals who are able to contribute the economy.