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Retirement funds are facing a crisis as the Covid pandemic grips hold of South Africa

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First published in the Daily Maverick 168 weekly newspaper.

The Sanlam Benchmark Survey released this week reveals the impact of Covid-19 on the retirement industry, with 27% of stand-alone retirement funds and 41% of umbrella funds’ employers reflecting suspended retirement fund contributions last year.

On average, the suspension was for 4.5 months, but two funds indicated they had suspended contributions for a year or more. Of union funds, 70% indicated that retirement contributions had been suspended for an average of five months.

Kanyisa Mkhize, chief executive officer at Sanlam Corporate, says the pandemic has been a setback for SA retirement fund members and retirees.

“The ultimate financial effect of Covid-19 was the reduced contribution level… The industry also recorded an increase in the number of employees cashing in a significant proportion of their withdrawal benefits.

“Tragically, 7% of stand-alone funds are in the process of liquidation, and no less than 40% of funds and employers say their staff or members experienced a reduction in pay; 27% of stand-alone funds and 31% participating employers cited retrenchment at the workplace,” she says.

Since the implementation of default regulations, funds noticed an increase in the use of retirement benefit counselling: 69% of stand-alone funds indicated they had made greater use of retirement benefit counselling.

Sanlam Corporate’s Avishal Seeth says this was demonstrated in the Sanlam Umbrella fund, where one of the main drivers of the increasing preservation rate was believed to have been proactive retirement benefits counselling. But this was not widespread. Since the introduction of the default regulations in 2019, stand-alone funds providing advice at retirement have increased by 38%. Yet Rigitté van Zyl, chief client officer at Sanlam Corporate, says there was a perceived lack of improvement in member behaviour on preservation and annuitisation since then, with 57% of stand-alone funds saying “that they have not seen an improvement in member preservation. Some of the main reasons cited include members wanting access to their cash, inadequate communication, and the deterioration in economic conditions in South Africa”.

Danie van Zyl, head of smoothed bonus centre of excellence at Sanlam Corporate Investments, says the average employer contribution, as a percentage of salary, was 10.84% – the highest since 2015. “Six percent of funds reported that the employer does not make any contribution to retirement funding. In all likelihood, these employers remunerate staff on a cost-to-company basis and all contributions to retirement are viewed as employee contributions. The average employee contribution rate remained steady at 6.62% of salary,” he says.

Darryl Moodley, head of tailored investments at Sanlam Corporate Investments, pointed out that SA will have an estimated R1.7-trillion infrastructure funding shortfall over the next 10 to 15 years.

“This infrastructure funding gap presents a tremendous opportunity for long-term investors — such as retirement funds — to step in to fill the void. Long-term infrastructure assets could provide retirement funds with a perfect long-term hedge as well as offer attractive risk-adjusted returns if managed well,” he says.

The Sanlam survey shows that stand-alone retirement funds indicated they would invest on average 6.6% of their fund assets in infrastructure, with participating employers of umbrella funds indicating an allocation of about 4.7%.

“While this may appear to be a fairly small allocation, considering that retirement funds consist of around R4.5-trillion in assets, it translates into almost R300-billion in direct infrastructure investments, which is fairly substantial,” Moodley says.

Malusi Ndlovu, director of large enterprises at Old Mutual, says investing in infrastructure offers decent diversification, particularly in the context of the comparatively small local equity markets. “This is because infrastructure assets are less volatile than equities and show a lack of correlation with traditional assets like property.”

The Global Pension Index (GPI) ranks the retirement income systems in 39 countries. SA came 27th.

Saleem Sonday, head of group savings and investments at Allan Gray, attributes this to a lack of preservation and inability to retain retirement contributions within the system.

David Knox, lead author of the Mercer CFA Institute GPI, touched on four areas that could improve a country’s performance on the GPI:

Broadening the retirement system coverage to include the self-employed and workers in the gig economy.

Increasing the government pension or retirement age. There is a fine balance between pre- and post-retirement populations. Managing this differently could mean fewer retirees and more workers.

Reducing leakage from the retirement funding process.

Reducing fees system-wide.

These pillars tie in with Van Zyl’s observation that the foundation of a financially healthy retiree remains: saving enough through adequate contribution levels; selecting the appropriate portfolio; preserving; considering wider needs; and getting the right guidance or advice. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.

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