Retirement planning should maintain standard of living

“To understand why so many members fall short of their retirement goals and how trustees and employers can help, we have to understand the reasons contributing to the shortfall ” says John Anderson, Alexander Forbes Financial Services (Pty) Limited.

Anderson believes a combination of the following factors has resulted in less than ideal retirement outcomes for working South Africans:

• Low contribution rates.
• Failure to preserve retirement credits from previous jobs.
• Poor performing investment portfolios.
• Inappropriate annuity choices being made by individuals at retirement. For example, large lump sums with high drawdown rates taken along with insufficient allowance for inflation or spouses pensions.
• Investment returns that do not keep pace with salary increases.  In order to maintain the same standard of living after retirement, the investment returns achieved on retirement savings need to keep pace with salary increases.
• Individuals failing to choose investment portfolios that are appropriate to or consistent with their retirement goals.
• Individuals saving for retirement based on pensionable salary - which is only a portion of total salary. Since individuals are used to living on their total income a gap develops between what people save for retirement and what they actually need to maintain their lifestyles.

Whether due to poor management, insufficient administration or short sighted personal behavior it is very clear that South Africans, including trustees and employers, can’t keep on doing the same things and expect a different outcome.

To help members/employees save adequately for retirement “trustees and employers need to ensure that more focus is directed towards the strategic aspects associated with managing retirement funds” says Anderson.

“Up until now, there has been too exclusive a focus on returns and operational compliance” comments Anderson. Instead, employers, trustees and management committees can ensure that shortfalls don’t occur for future members by applying what Anderson calls outcomes-based governance which:

• Focuses on the needs of and the outcomes required by each individual member.
• Elevates the role of the employer in managing retirement savings since people look to their employers for assistance regarding their retirement, health and other employee benefits.
• Requires that employers and trustees work together to most appropriately address needs and improve the outcomes – for the individual member, the employer and society in general.
• Recognises that successful employee benefit programmes require a holistic approach allowing the various elements to fit together while avoiding overlaps, identifying shortfalls and addressing inefficiencies.
• Provides sufficient measurement tools to determine whether; individual members are on track, the factors impacting the achievement of a reasonable pension during retirement are the correct ones, and the intervention strategies chosen are successful.
• Requires regular checking on whether the policies implemented are achieving their goals.

In short, “all the decisions made under the outcomes-based approach should be measured against what is most likely to give the best range of retirement income results for each individual – not how well the investment may perform” says Anderson.

So, while we do not know what the future will hold, all decisions made should be driven by the goal of achieving a good retirement income for each member.

This means that employers, trustees and management committees of umbrella funds (mancos) need to focus on the key issues impacting the retirement outcomes of their members and the factors that affect the achievement of those outcomes.

If looked at like this, “governance itself should be assessed by the extent to which it focuses on, and facilitates, an appropriate retirement income range for its retirees – this is the key factor that trustees and employers most need to focus on” concludes Anderson.