MENTENOVA CONSULTANTS & ACTUARIES: Expert Opinions: Edition October 2019 / January 2020

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Is retirement preservation adequately
designed for millennials?

Manie de Bod, managing director of Mentenova
Consultants & Actuaries, is helpful.

The professional working world has changed significantly since millennials1 started entering the SA workforce. The days when employees spend 20 to 30 years working for one company until their retirement is quickly coming to an end. This has an impact on trustees of retirement Funds in the way they structure their funds and communicate with members.

According to the Deloitte Global Millennial Survey 2019, 49% of global respondents indicated that they are considering a change in job within the next 24 months. A quarter of these respondents moved to their current job in the previous 24 months. The research also showed that the reason people are changing jobs is because they are either in a hurry to climb the corporate ladder, in search of better salary packages, or looking for career progression.

According to the administrators of the Liberty Corporate Selection Umbrella Fund (the fourth largest SA fund in terms of individual members), millennials make up nearly 50% of the fund. This is in line with SA’s workforce make-up. 10X’s recent Retirement Reality report, released in September 2019, shows that 80% of people under the age of 35 responded that retirement saving was not a priority for them.

The fact that millennials tend to job hop, and don’t prioritise saving for retirement, delivers a significant challenge for the retirement industry. One of the biggest pitfalls is related to retirement savings where the success of the investment is based on a significant long-term investment horizon and the inherent benefit of compound interest.

Mentenova Consultants and Actuaries2 calculated the likely retirement outcomes of three hypothetical members that start their careers at age 22 , work until they retire at age 65 and make the same contributions, based on the same salary into the same investment portfolio3.

a) The first member, John, changed jobs a few times but preserved his benefits into a fund with a similar investment profile;

b) The second member, Themba, changed jobs a few times, but withdrew his benefits as cash every time he changed jobs and only started investing for retirement when he moved into a management role at age 37;

c) The third member, Ahmed, also changed jobs a few times, withdrew his benefit as cash and started investing for retirement when he got his dream job at age 43.

The graph below shows the investment growth and the compounding effect for each of the three members over their careers:

The effect of compound interest is clear from the graph above. John is able to retire comfortably and maintain his standard of living, but both Ahmed and Themba would have to supplement their retirement savings. While Themba only missed the first 15 years of savings out of a possible 43, the long-term effect on his retirement outcome is over 50% reduction compared to John.

1 Millennials, also known as Generation Y, is a demographic cohort of people born between 1981 and 1996.

2 Mentenova Consultants and Actuaries (Pty) Ltd is a specialised employee benefit and actuarial consulting business. It’s an Authorised Financial Services Provider (FAIS nr 46671) and a wholly owned-subsidiary of Liberty Holdings Limited.

3 This is a hypothetical example provided merely for illustrative purposes.

De Bod . . . preservation lessons

Missing out on the opportunity to build a substantial retirement nest egg Unfortunately, the tendency in SA is for people to cash out their retirement savings when they leave their jobs. This erodes the ability to take advantage of the magic of compounding. Albert Einstein said that compound interest is the most powerful force in the world:
“Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

With a generation that is likely to change jobs every three years until they reach a senior position in a company, retirement saving is left much too late. By the time the individual reaches the age of 35 or 40, this only leaves 25 to 30 years in a formal job. As a result, the first 13 to 20 years of potential savings is lost forever. To correct this trend Pension Fund Regulation 38, which is part of the default regulations that came into effect on 1 March 2019, requires retirement funds to provide members leaving the fund before retirement the option to preserve their money in the fund. It also encourages preservation by requiring the trustees of a fund to amend the rules of the fund to make provisions to accept transfers from previous funds. While this is a positive step, it may not necessarily encourage members (specifically millennials) to preserve their money. Fortunately, regulations attempt to address this by introducing benefit counselling that should be offered before any benefits are paid or transferred. This is an opportunity to educate the member about the benefits of preservation and what is offered by the fund. If utilised correctly, benefit counselling can make a positive difference in the retirement investment landscape.

Improved communication

Currently there appears to be a disconnect in the way funds communicate with its members, seemingly adopting traditional methods of communication. In order to appeal to millennials and to encourage preservation and amplify the positive outcomes, trustees and fund administrators need to speak to millennials using channels and language they’ll understand.

Multichannel communication

Millennials are digital savvy and often prefer to investigate something themselves rather than talk to a person. Therefore, funds need to consider digital communication that drives employees to simplified websites where the required information is hosted. There needs to be a seamless marriage between simplification to more sophisticated models and tools such as chatbots, mobile apps and online retirement investment calculators.

Proactive communication

Funds should provide information to their members proactively. We shouldn’t assume that members understand the power of

compounding or long-term investment returns. Benefit counsellors and financial advisers have a pivotal role to play in providing the member with all the information required to make a well-informed decision.

Effective Human Resources

We need to embrace the fact that members will change jobs often. It is therefore pivotal that employers’ Human Resource divisions are equipped to explain the benefits of preservation more clearly or ensure that benefit counselling processes are in place for members of the fund. Employers receiving new employees should discuss the opportunity to transfer funds into the new fund and equip new members with this information as early as possible by making it a part of the employee offer letters.

Mentenova Consultants and Actuaries’ experience indicates that most businesses struggle with staffing issues. At the top of their mind is the number of employees that have financial difficulties and look to their employer to support them. This assistance, particularly related to the financial benefits of retirement preservation, may ultimately ensure that employees remain invested for their retirement and build a long-term relationship with their employers.