South Africans struggle to save enough for their retirement, so the proposed two-pot system introduces welcome enhancements, as shown by Old Mutual’s SA Retirement Gauge research.

The prospect of retiring one day can be daunting, not only from a mental point of view, but also from a financial perspective. As many as 94% of South Africans face the prospect of having to make significant changes to their lifestyle to adjust to a lower level of income. However, the pending two-pot regulations could help change the future of the thousands who prioritise their lifestyle today at the cost of their future, notes Old Mutual Corporate Consultants.

This was one of the key messages released recently during the presentation of the inaugural “Old Mutual SA Retirement Gauge 2022” research. The first project of its type to take an authoritative, in-depth look at the retirement savings habits and retirement readiness of South Africans belonging to umbrella funds through their employers’ occupational schemes.

Based on actual data, rather than a survey or interviews, Old Mutual analysed almost half a million members of three large umbrella funds representing retirement savings of over R138 billion.

“The analysis covered around 6300 different schemes offered by a wide range of employers of different sizes and across all industries, making it a very representative analysis of South Africans saving for retirement,” says Andrew Davison, head of advice at Old Mutual Corporate Consultants.

The analysis confirmed that employers with a mostly blue-collar workforce tend to favour provident funds, with the vast majority of provident fund members (almost two-thirds) earning below R10,000 per month, compared to only a third of pension fund members.

The Retirement Gauge indicated that around half (48%) of members work for employers where the normal retirement age (NRA) is 65. This is important because longer lifespans mean that retirement can be a significant period of time, and this places pressure on finances. Around a third of the members are in schemes with a NRA of 60 – these people have a much more onerous task to have saved enough money to be able to retire financially secure – they have five years less to save and five years more to draw a pension; a double whammy.

Many employers offer a package of employee benefits. The retirement fund often incorporates risk benefits, covering the individual and their family in the event of death, disability or critical illness. Given the pressure to provide more take-home pay, critical trade-offs need to be made between the cost of these risk benefits and the amount left over for retirement savings. The average net contribution to retirement is 12.6% of pensionable salary for pension funds and 10.8% in provident funds. A quarter of all members across pension and provident funds are contributing at the recommended level of 15% or more. “It is also encouraging to see that 4% of provident fund members and 2% of pension fund members are taking advantage of the opportunity to contribute a net percentage above 20% of pensionable salary,” says Davison.

“Analysing a large group of people with varying levels of salary and savings requires a standard measure of retirement readiness. The ‘multiples of annual salary’ concept not only provides a standard measure, but is also simple to understand, making it a very valuable measure for assessing and communicating a person’s journey towards a successful retirement outcome,” insists Davison.

“The question is how much retirement money is enough? The easiest way of quantifying this is by looking at multiples of annual salary, which takes present savings and divides this sum by the annual salary. Therefore, if a person’s savings are R120,000 and their annual salary is R120,000, the multiple is one. The aim, as a starting point, is to achieve a multiple that will allow them to retire on a pension that is 70% of the final pensionable salary.

“For a man of 65, buying a ‘with-profit’ annuity will require savings of about nine times annual salary. For a woman, about 8% needs to be added as she is likely to outlive a man of the same age. To retire earlier than 65, taking into account the double whammy mentioned earlier, a higher multiple of salary is required and the time available to accumulate that multiple while working is shorter.” Davison adds that the type of annuity selected will also impact the salary multiple. For instance, a living annuity will need more capital as no one knows how long they will live after retirement.

The research indicates that average multiples for men and women of all ages do not reflect the progression needed to reach the target multiples of 9.0 to 9.7 times at age 65. The net result is that the average multiple achieved by people as they approach 65 is only in the region of 2 to 3 times.

Two main factors are behind this, and they are well known. The first is inadequate contribution levels. Although some members are contributing enough of their salary, about two-thirds of provident fund members and a third of pension fund members are contributing less than 11% of their salary towards retirement savings. The second factor is lack of preservation of savings when changing jobs. In this regard, the analysis paints a disconcerting picture. People who change jobs in their 20s cash out more than 90% of their savings. With a long time ahead of them to retirement, young people tend to believe that they have the time to catch up. The reality is that saving enough for retirement is achievable, but not easy, and doing it successfully requires starting from the first pay cheque and growing those savings steadily over a long period. What is perhaps more surprising is that people changing jobs in their 50s still cash out around 50% of their retirement savings. Given the fact that few people are on track for a comfortable retirement and the fact that people in their 50s have limited time left before retirement, one would expect that preservation rates would be much higher for this group.

“The interesting finding is that income level did not lead to better preparedness for retirement, at least not based on this analysis of savings within employer schemes. The levels of savings, relative to salary, were remarkably similar across all income bands. It seems that, as South Africans earn more, they tend to spend more on improving lifestyle rather than building funds for retirement,” explains Davison.

The only exception is those employees earning below R10,000 a month. These employees contribute at a lower percentage on average, and this translates directly into lower savings levels, culminating in multiples of annual salary close to retirement that average 1.5 to 2. It is important to note that people in the lowest income band are the ones who are most likely to satisfy the means test enabling them to claim the state old age grant, which would boost their overall retirement income, bringing them more into line with other income groups in terms of replacement ratios.

An encouraging insight from the analysis is that people with long service with their employer do, on average, manage to build up healthy savings approaching the required 9.0 to 9.7 times. People with 35 years of membership in a retirement fund have savings reaching a multiple of eight on average.” This reinforces the fact that preservation is key, as these members are effectively “preserving” their savings for this extended period as they don’t change jobs, so don’t withdraw their savings. Unfortunately, people with 35 years of service are vanishingly rare. In the analysis, around three-quarters of the members had 10 years or less service with their current employer.

The evidence of the benefits of staying invested, or preserving one’s savings, lends support to the two-pot system. This will provide people with more flexibility in relation to a portion of their savings, with the other portion dedicated to their retirement plan. “However, long-term planning, discipline and careful money management will remain critical in ensuring that South Africans are able to build savings for their own futures and that of the country,” concludes Davison.

Old Mutual Corporate Consultants is a division of Fairbairn Consult FSP 9328, a member of the Old Mutual Group. Fairbairn Consult is a licensed FSP.