‘Retirement crisis could get worse’

The percentage of working South Africans likely to cash in their retirement savings if they changed jobs has almost doubled over the last four years.

According to the 2017 Old Mutual Corporate Retirement Monitor, the percentage of people saying they would withdraw their benefits has increased from 19% in 2012 to 35% in 2016. Even where people earn more than R40 000 a month, 27% of respondents still said they would cash in. One-thousand-and-eight urban South Africans, broadly representative of the South African population, were surveyed via telephone.

Malusi Ndlovu, head of Old Mutual Corporate Consultants, says this is quite concerning. People earning at this level have access to financial advice and one would have expected them to be budgeting and saving and not to be in a position where they radically wanted to inject lump sums into their finances.

Even among people closer to retirement (a booster subset of people 55 years and older included in the sample), a significant percentage still signalled that they would withdraw a part or all of their benefits if they changed jobs.

The findings come amid a retirement crisis in South Africa, with only a small percentage of people in a position to maintain their standard of living in retirement. Early withdrawals are one of the main reasons for the dire situation.

While the survey did not specifically ask respondents whether cashing in was due to necessity or to enhance their lifestyle, the increase in the percentage of people signalling an intention to withdraw may be a function of economic factors.

Consumer confidence dropped between 2012 and 2016 and disposable income has come under pressure. Some people have fallen into debt, arguing that a lump sum could relieve the pressure.

Since the research was conducted during the latter part of 2016, the results may also reflect the spill over of confusion around amendments to the Taxation Laws Amendment Act and misconceptions that the proposed changes would result in the government taking people’s retirement money, Ndlovu says.

According to the survey, about 30% of working South Africans have no formal retirement provision whatsoever (58% of those earning less than R5 000 per month).

Andrew Davison, head of implemented consulting, says South Africans earning less than R5 000 per month are in survival mode and although they may be saving in stokvels and grocery schemes, a very high percentage don’t have any formal savings.

In this income segment, the old age grant of R1 600 per month could replace 32% of the monthly salary, and with just a small amount of additional savings, individuals could replace close to 50% of their salary in retirement, which makes saving in a formal vehicle like a retirement annuity less attractive.

Roughly a quarter of people don’t think they would reach retirement age. Debt is also a significant problem – not only are low-income earners highly indebted, but it is often the most expensive debt available.

However, where people earn R40 000 or more each month, the statistics are not vastly better and the “lure of the billboard” may stand in the way of sound retirement decisions, Davison says.

Ndlovu says South Africans are struggling to figure out how to split their money between meeting their needs today and providing for retirement.

There is often also a lack of financial literacy. People are oblivious to the benefits of compound interest and don’t realise the long-term impact early withdrawals will have on their retirement savings, adds consultant Erhard Theunissen.

While the process of retirement reform is slowly taking its course with compulsory annuitisation in the provident fund space still up in the air, average life expectancy has increased significantly. After a fantastic run in equities, local retirement fund members have now entered a lower-return environment.

Is South Africa setting itself up for an enormous crisis 20 years from now?

Davison says this is a difficult issue, “because it is already actually a crisis. That is the reality… already people cannot afford to retire”.

To some extent, retirees in living annuities have been bailed out by the excellent investment returns over a 20-year period, which has masked the fact that people haven’t saved enough. A low-return environment exacerbates the problem, he says.

“I think it is already a crisis. It is just not going to get any better, it is going to get worse.”

The crisis will intensify if the issue isn’t addressed, adds Ndlovu.

In the developed world the lack of provision for retirement and increased longevity have led to a situation where many defined benefit funds (where the employer guarantees a pension in retirement) had to be bailed out, but South Africa is going through these changes at a time when the majority of people are in defined contribution plans (where the member carries the investment and longevity risk).

It doesn’t have the option of being bailed out by the fiscus, Ndlovu says.

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