Covid-19 cash crunch: Don’t touch your retirement savings! Guy Chennells, Discovery

BizNews founder Alec Hogg chats to Guy Chennells – the Product Head at Discovery Employee Benefits – about the risks of accessing your retirement funds to help you through this Covid-19 crisis. Chennells, who is a renowned actuary, suggests that before you touch your retirement savings, you undergo the mental exercise of imagining what you would do if you did not have that money. On a positive note, Chennells points out that if people are able to continue to curtail spending, and stick to behaviour adopted during the current financial crisis, it will serve them very well in the future. – Nadya Swart

Guy Chennells is an actuary from UCT, where he studied. He’s also the head of product and the general manager of employee benefits at Discovery. Guy, a question that we get asked often from members of the business community is that they are under pressure and they’ve got retirement savings – is it a good idea to cash in those retirement savings so that they can at least survive this Covid-19 pandemic crisis?

Guy Chennells
Guy Chennells

It is a very real question, no glib answer will do it justice. I’d like to answer it with a few angles because the people who are asking are in different circumstances. The first thing I’d suggest is that you go through the mental exercise of imagining: what would I do if I did not have that money? If that money was not an option, what would I do practically? There are two reasons I would suggest you do that. One is: if you do cash out that money, it will be devastating for your long term financial future. I won’t be impossible to catch up on that in some circumstances, but it will be extremely hard.

You’re unlikely to do the things that you would be required to do to catch up on whatever money that you cash out. The second reason is: once you’ve run out of money – you may be in the same situation you’re currently in, and you’ll have to take the steps that you would take if you didn’t have that money anyway. It really is worthwhile, I would suggest, to really think about some severe steps you could take, moving in with your parents or selling a car or something like that, to resist taking that money for as long as possible.

You guys work a lot on behavioural change. Have you seen changes in saving habits or even spending habits during these months that we’ve been under lockdown?

I talk about behaviour change a lot. I find it very difficult to make behaviour change in my own life. This Covid experience is the first time I have seen a dramatic change in my own spending behaviour and it happened without me trying. Therein lies an incredible opportunity in the dark time that is Covid. This external event has done something for us that we’ve all struggled to do since we ever started thinking about trying to save. That is to curtail our spending, to cut out some of the things that are attractive but unnecessary, and thereby to create space in your monthly income for saving, because saving almost never happens as a product of changed income. People experience this time and time again – income goes up and so does your spending.

Covid-19 has taught us to save

Saving happens because you take explicit steps to curtail your spending within whatever income it is that you currently have and this has been done for us. That is an asset that people now have coming out of Covid. Whenever it is that you come out of it, that you might come out in five years time when you recover from the income shock you’ve experienced. If you hold on to the saving and the spending habits that you have been forced into doing because of Covid, you’ll be in an incredibly powerful position for your long term financial future.

What benefits have you got, unexpectedly from this period?

I’m not spending on coffee’s, restaurant, I’m spending much less on transport, I’m not spending on expensive luxuries like alcohol. Then there are a number of other expenditure items that occur because you’re out and about: you’re in the malls, you’re seeing people, you’re going to birthday parties. All of that stuff has been forced down and I’ve experienced a real reduction in my monthly expenses simply because of those items. Some of them will not persist beyond Covid automatically, perhaps transport, you’ll end up needing to travel back to work again, but some of these habits can if we choose to maintain those trajectories.

It’s just a little bit of focus, perhaps being more mindful about where the benefits have come from. We will look at this as the downside, but at least for your savings and I know from my own experience. We went to a restaurant for the first time since lockdown on Saturday night. It’s a big restaurant, The Grillhouse in Rosebank, and usually seats 400. They had 45 bookings for the whole night. It’s not just you and I who aren’t spending at restaurants anymore.

Absolutely, and when you think of what you would spend at a night at The Grillhouse – you’ve become used to it, but it is quite an alarming amount. You would spend half of that, less than half of that if you had a great meal at home. People have become much more used to enjoying their homes and enjoying spending time in their homes and thereby saving a lot of money.

It’s like a fringe benefit in a way. Just to return to the whole story about cashing in your savings, there are numerous people who believe that the economic consequences of Covid-19 are going to be dire for South Africa. As a consequence, they just want to get their money out of the country. They want to invest it somewhere far away, because they feel they can get a better return and when they talk about their money, that includes retirement savings. What’s the counter-argument to that?

Remember, Covid has devastated the global economy, not just South Africa’s economy

I suppose there are a number. The first is that Covid is a global problem, not just a South African one. I know we are closer to the problems in South Africa, so they feel more real but the problems are the same all over the world. Everybody is going to struggle economically emerging out of Covid.

The second one is that you really have to be unbelievably bullish to do something like cash in your retirement savings to take it offshore. You have to be incredibly bullish on the differential you’ll get offshore, because you’ll have a large, immediate guaranteed tax loss that you will encounter and the excess returns you have to earn somewhere else, is huge before you even start to get dividends on that decision.

Maybe the third and final one is that you do have material exposure to offshore within your retirement savings. Most retirement savings have up to 30% in offshore equities or offshore assets in total and a lot of South African courses are doing okay because it’s exposed to the global market. Your assets are more globally diversified than perhaps you’ve realised.

To add to this is the concern about the reintroduction of prescribed asset requirements. Is that something that, again, is an irrational fear?

You just never know what’s going to transpire. The latest thinking that I’ve seen around this is that prescribed assets is perhaps the wrong term to use for what might transpire. What might transpire is something where you create incentives and space within the regulation that governs the way that retirement assets are invested. For people to invest in things that also help the country, for example, major infrastructure products or projects, etc., which can produce really exceptional, stable inflation-beating returns over the long term.

It has been an asset class that has been under-invested in by retirement funds because it is difficult to get into and to manage. If the work is done around those asset classes to make them easier to invest in by retirement funds, they can be exceptional investments for the investees while also providing the capital that the country requires to kickstart its way out of an economic slump. That’s where I would hope we would go.

It’s not all bad news.

I would hope so. There are ways to do it in a really heavy-handed way that would be detrimental. I think what we’ve seen so far is that there’s enough debate and enough power on all sides of the table for that not to materialise.

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