Retirement funds at inflection point
Financial literacy has to play a much bigger role in advisory offering – consultant.
JOHANNESBURG – Retirement fund decisions are taken by a generation that believed in hard, consistent work, investments intangible assets and pensions would determine the outcome for a generation that believed in immediate gratification and invested in experiences rather than material items, an employee benefits consultant has said.
Speaking at the Sanlam Benchmark Symposium 2017, Avishal Seeth, branch head of Simeka in Gauteng, said the industry was entering an inflection point in retirement funds.
Millennials (very broadly those born between 1980 and 2000) were not investing in experiences like holidays purely out of choice. Big material items like houses were simply not affordable for a lot of these individuals. It was easier for a millennial to save R15 000 for a holiday to Thailand than an R125 000 for a deposit on a house, he said.
“This points to the changing financial pressures that we as millennials face. For a lot of millennials, property ownership is simply out of reach.”
Seeth said with the generational shift, millennials were also changing jobs more frequently. The research suggested that the average 25-year old would have between eight to ten different employers in their lifetime, while he or she would only preserve their retirement benefits once when changing jobs.
He argued that the industry was in need of a mechanism that allowed members to stay invested each time they joined a new employer.
“We need financial literacy to form a much bigger part of our advisory offering because that is what will empower members to make the right financial decisions.”
According to the 2017 Sanlam Benchmark Survey, an annual retirement funding study, almost 73% of professional, middle-class South Africans experience financial stress.
“Why then do we only have a preservation rate in the industry of less than 5%? Surely there is a gap between the 5% and the other 27% that aren’t financially stressed?”
Seeth said part of the solution to this conundrum could be benefit counselling – the provision of information to members of retirement funds.
“The information provided must complement the elected defaults of that particular fund in order to ensure the best possible outcome for that member.”
Defaults are automatic choices made on behalf of retirement fund members who do not exercise their choices in a given situation. While retirement funds are not currently required to offer default options by law, the industry is moving in this direction. National Treasury released revised draft default regulations for retirement funds in December 2016.
Advisors or consultants should assist retirement funds in getting to the correct default for their membership profile. The default selected was absolutely critical and counselling had to work hand-in-hand with the default, Seeth said.
He conceded however that there were a number of concerns around benefit counselling. There was a very thin line between counselling and advice and strict controls had to be put in place to ensure that this line wasn’t crossed.
There was also uncertainty about whether product providers or consultants and advisors had to provide the counselling.
Seeth said a lot of product providers had already built counselling into their product offering. While there was some concern that product providers were effectively trying to cut out the middleman, he didn’t believe this was the case, but that it was an opportunity to embrace financial inclusion.
“A lot of members of retirement funds do not have access to advice, to information, to counselling. They cannot afford advice and a lot of the retail advisors will tell you that it is not worth their while to speak to the majority of members of retirement funds from a financial perspective. So this is a great way of empowering all members of retirement funds and not just those that are lucky enough to be able to afford advice.”
Seeth said fintech could form part of the solution to improve ease of access to information.
The most obvious challenge with this approach was the high cost of data in South Africa. Nevertheless, half of employers and three out of five umbrella fund members surveyed suggested that they would consider using fintech to improve access to information.
Seeth said against the background of generational shifts, changing legislation and human emotions, it was clear that advice was more important than ever before. In the South African socio-economic context, where savings was a luxury rather than a normal run-of-the-mill occurrence, advisors had to factor in financial literacy into their advisory offering.
The super consultant
He said there was a need for a “super consultant” that would be able to provide advice around the initial choices made by members in a pension fund. Research showed that nine out of 10 members did not review the choices they made on their first day of employment.
The super consultant also had to review member outcomes on a regular basis.
Seeth said for a long time consultants and the board of trustees had been patting themselves on the back for the structures they created for retirement fund members.
“Creating a structure only enables a good retirement saving environment. It does not ensure that members’ outcomes are actually good. There’s other ways or other things that we need to do to improve members’ outcomes.”
The super consultant also had to provide advice on benefit structures, regulation, taxes, investment strategies, provide input on member financial planning and had to influence product development and product providers, Seeth added.