Only 29% of SA employees will have a comfortable retirement – survey

In popular culture, retirement is often painted as the golden years, a time to sit back and enjoy the fruits of a lifetime of hard work. Unfortunately, that attractive dream is very far from the reality for the majority of South Africans. According to a recent survey, only 29% of working South Africans who are invested in pension funds are going to have enough money to retire comfortably. That's horrifying – less than one-third of people who have jobs and who are actually investing in a pension fund are going to be able to retire! Imagine the proportion if you consider the whole country, many of whom are unemployed or not fund members.

For the majority of South Africans, then, retirement is in fact a cold and frightening phase of life, when expenses must be cut to the bone and income must be earned if at all possible, even as ill health and old age begin to bite. It's a bleak picture. – FD

ALEC HOGG: The 2014 Benchmark Symposium could be considered as providing the retirement industry with its most comprehensive research survey. Joining us for more is Danie van Zyl, Head of Guaranteed Investments at Sanlam Structured Solutions, which is part of Sanlam Employee Benefits. Are you based here in Johannesburg?

DANIE VAN ZYL: Cape Town.

ALEC HOGG: In Cape Town?

DANIE VAN ZYL: Yes.

ALEC HOGG: I thought Johan van Zyl was moving all you guys up north.

DANIE VAN ZYL: Well, we're all staying behind in the Cape for now.

ALEC HOGG: What's the balance now of your head office in Cape Town versus Johannesburg?

DANIE VAN ZYL: I would still say the bulk, especially more on the administration side, is in Cape Town but over time things will unfortunately change.

ALEC HOGG: Well, there's lots more commercial activity, here in Johannesburg. It's an interesting survey, Danie. Twenty-nine percent was the number that jumped out at me. Well, you tell us. What's the 29 percent?

DANIE VAN ZYL: When we interviewed principal officers for our retirement funds, we asked them 'how many of your members do you expect will be able to maintain their standard of living when they retire' and the figure came in at 29 percent. It tallies with the 32 percent of pensioners who think they have enough capital to last the rest of their lives.

ALEC HOGG: What happens if you are one of those 71 percent who don't have enough to continue?

DANIE VAN ZYL: Unfortunately, once you hit retirement you can't really roll back the time and redo some of the decisions you made when you were younger. Unfortunately, you have to cut back on your expenses. What we find is that members do cut back, especially on medical expenses – very few of them can continue with medical aid contributions – and you need to find alternative ways of getting an income.

ALEC HOGG: Danie, that's crazy. You spend 80 percent of your costs on healthcare in the last ten years of your life, so if you cut back on your medical aid after you retire, you're putting yourself into penury.

DANIE VAN ZYL: Definitely. People are living longer, but it doesn't necessarily mean all these extra years are active and healthy years. Unfortunately, you do spend a lot of the time getting medical attention, so it does create a problem and I think there's lesson for active members. Make sure you make the right decision as you build up towards retirement.

GUGULETHU MFUPHI:  Well, surely there's something about South Africa's savings culture, which we all know about, where we've probably spent so much more on debt than focusing on savings.

DANIE VAN ZYL: Yes, if you look at the results, one of the biggest mistakes members make is when they change jobs. All too often, they raid the piggy bank and take the retirement fund money in cash. What we do find is that most of the money is spent on living expenses and short-term debt. Once that money's spent…unfortunately, it's gone. You can't make it up again. As I said, it's one of the biggest concerns that we have in the industry. When we talk to principal officers, they identify that as one of their biggest mistakes made on their way to retirement.

ALEC HOGG: Do you track where that money actually goes? I say this because when you go into the rural areas, you'll find many assets that are perhaps below the radar. There are herds of goats, herds of cows, and nice homes that have been funded by the changing of jobs.

DANIE VAN ZYL: We do look at our survey and yes, people start their own businesses. They do home improvements. However, the thing that really jumps out at you is the short-term debt, which is your store card, credit cards, living expenses and groceries etcetera that the money is being spent on. Unfortunately, paying your mortgage loan is farther down on the list as well, so it does show that there's a struggle between your expenses where you just keep things going, and saving for retirement on the one hand.

GUGULETHU MFUPHI:  Why not change the rules and keep that money locked up until retirement?

DANIE VAN ZYL: There are many moves on the go to make the default at least, that you save your money for retirement. Unfortunately, I'm not of the opinion that you can make it compulsory. It's very difficult to tell someone who lost his job and now can't feed his family 'you can't touch that money. You need to save until retirement'. At the same time, many thousands of members just take the retirement fund money because it's the easiest thing to do. They don't know any better. They see it as a small amount of money. They don't really pay attention to it and they forget that a small amount of money, over a 20/30-year period, can compound nicely as your retirement nest egg.

ALEC HOGG: Danie, there was a lot in the Budget about this. Pravin Gordhan is addressing… Certainly, the government wants to address these issues. Talking about the South African equivalent to 401K etcetera, how do you see all this developing?

DANIE VAN ZYL: The current proposal is to try to nudge members towards preservation – to make it a default, if they don't make any choice. At the moment, no one wants to compel a member, if you lost your job, to actually preserve your money.

ALEC HOGG: Danie, that's not going to happen. You're not going to be able to compel members. It has been tried before and labour says 'no'. That's what happens in this country.

DANIE VAN ZYL: That's the truth.

ALEC HOGG: Where's the incentive? That seemed to be the direction Pravin was going in.

DANIE VAN ZYL: It seems that they want to allow you to take up to a certain percentage every year. That's the maximum. For example, if you lost your job, you can access ten percent of your time constraints in any given year and that will hopefully stretch things out a little bit allowing you to take your time to get a new job, so that you don't access and spend all the money in one go. There seems to be a nudge and the whole idea from Treasury appears to be that after a few years, they'll review it and see if it changed anything. It's still a long way before we get there, though.

GUGULETHU MFUPHI:  Indeed. Well, let's touch on the rate of returns: 19 percent – quite substantial.

ALEC HOGG: But that's growth. Now I want you to tell us what the net rate was.

DANIE VAN ZYL: Unfortunately, it differs from fund to fund. If you look at most balance funds, you like at fees between point-seven percent and one percent per annum, so you need to consider that as well.

ALEC HOGG: That's still 18 percent per year.

DANIE VAN ZYL: That's still good. It's better than the previous two years. Unfortunately, most of the trustees we surveyed expect this year to be not as great as the previous….

ALEC HOGG: But isn't that realistic? You can't grow at 18 percent net.

DANIE VAN ZYL: Unfortunately, you can't have a bumper year every year. I do agree. Perhaps it's something you need to consider when designing a structure and making your investment choices for members, especially members close to retirement who don't necessarily want to have that rollercoaster ride as they head into retirement.

ALEC HOGG: Shareholder activism seems to be taking hold, but slowly.

DANIE VAN ZYL: Very slowly. It seems that most funds largely abdicate to their asset manager and very few actually want feedback or are clear about feedback from their asset manager on how they actually voted, even on an annual basis. They do not really engage with asset managers on this. When we ask them why, it's often 'not at the top of my mind. I haven't really thought about it' or 'the asset managers are experts' and they leave it in the asset managers' hands.

GUGULETHU MFUPHI:  Coming back to asset managers, it does seem as though several South Africans decide to go their own route when it comes to retirement saving and not directly through asset managers.

DANIE VAN ZYL: If you go into a formal sector pension fund, you would go via an asset manager or for example, in a retirement annuity. It does seem, especially amongst self-employed people, that they prefer other sources of savings, in a house or a business etcetera, bypassing the asset manager. Although that has certain risks, it does appeal to certain members.

ALEC HOGG: Well, ETF's outperform in the long term. Have you seen the latest? Warren Buffett has taken on Wall Street. He took the SMP-500 and Wall Street, who had a gamble against him, took five hedge funds (I think). This happened six years ago. Just the SMP-500 or an Exchange Traded Fund like the Satrix 40: the return there has been 44 percent as against the active managers at 15 percent. Now, guess where I'd be putting my money.

DANIE VAN ZYL: Definitely. In South Africa, it seems that the whole idea of trusting an investment is very slow to take hold. If you compare it against overseas, we do lag behind the international market there and largely, it is strange. Not that many managers consistently outperform the index and there's a big fee differential between active and passive. You would think more funds would blend active and passive in their underlying assets, but very few seem to do that. We seem to still favour active management in South Africa, for whatever reason.

GUGULETHU MFUPHI:  Well, that raises a question regarding fees, then.

DANIE VAN ZYL: Yes, there's a big differential of fees, but it seems that you have certain well-established asset managers who have a good name, and people are willing to pay extra money because they believe this manager will outperform the index. Whether it turns out that way or not, is debatable.

ALEC HOGG: When you say 'people', do you mean trustees of pension funds?

DANIE VAN ZYL: Trustees and even members. Most of our funds have Member Choice. You have your choice between a couple of asset managers and members tend to stick to a certain brands they know/see advertised, and there's a perception about this manager in the market.

ALEC HOGG: Danie, thank you. It's good talking with you and thanks for those insights.