By Anja van den Berg
Imagine being financially secure at retirement, enjoying your life without financial stress. This may seem like a fantasy in a country where, according to the National Treasury, 94% of people fail to retire with adequate financial resources.
Yet, just a few decades ago that was how most South Africans retired from their company’s defined benefit (DB) pension funds, says Steven Nathan, founder and CEO of 10X Investments, an authorised financial services provider, licensed retirement fund administrator and investment manager.
“Sadly, there are virtually no defined benefit funds left in the private sector,” Nathan adds.
So how did we get here?
“In summary, it is the result of vested and conflicted interests. A DB pension is a serious financial obligation that employers must adequately fund (monthly contributions of around 15% of salary). The employer must ensure the contributions are optimally invested for long-term growth (invested in a high-equity fund), and that fees are minimised.”
The employer typically reviewed a DB pension fund at every board meeting as it had to fund any mistakes, which were called deficits, meaning pension obligations exceeded pension assets.
When defined benefit pensions were the norm, many pension funds recorded deficits despite employing many financial experts, including actuaries and fund managers.
Companies were uncomfortable funding these complex, large obligations, and the pension-fund industry saw an opportunity to earn higher fees by advising pension funds to transfer these obligations to employees.
“This convenient marriage led to the introduction of defined contribution funds, where the employer no longer guaranteed the benefit – your pension!” Nathan continues. “The only aspect guaranteed was the contribution you made.”
The solution to a problem that companies and their army of expert advisors could not solve, was thrust upon unsuspecting employees.
“Employees were told they were the winners. The true winners were companies, which no longer carried this financial obligation, and the retirement fund industry, which could charge unsuspecting employees for more services and at higher costs.”
But it doesn’t have to be this way, Nathan says. There is some light in the tunnel.
You need to do three things to dramatically improve your retirement outcome:
- Firstly, you must save adequately, which is at least 15% of your total salary.
If 15% is too high today, save what you can but commit to increase this by 1% or 2% at each salary increase and also include any bonus in your savings.
- Secondly, you must invest for long-term growth rather than focus on short-term stock-market performance. This is best done by investing in a high-equity index fund, also called a balanced fund, where around 75% of your money is invested in local and international blue-chip companies.
- Thirdly, you must reduce the total fees you pay to your advisor, asset manager and product provider.
This is best done by keeping things simple and investing in a low-cost index fund, Nathan says. “Research shows that most fund managers do worse than the market, so you pay high fees to underperform.
“Rather, pay low fees to earn the market return. You don’t need an advisor to pick index funds, so you avoid ongoing advice fees. Each 1% you save in fees can increase your final pension by around 30%. These principles also apply at retirement if you invest in a living annuity.”
HR Future: https://hrfuture.net/articles/strategy/risk-management/why-only-6-of-south-africans-look-set-to-retire-decently
National Treasury: http://www.treasury.gov.za/