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BUSINESS DAY TV: Retirement industry in need of reform, survey shows

EXPECTING people to save voluntarily for their retirements is a system destined to fail, Simon Pearse, CEO of Marriott — The Income Specialists says.

Mr Pearse said on Monday various studies on retirement savings had shown similar findings: people are not saving nearly enough for their retirement, and most are in denial about how they will survive financially in retirement.

For a voluntary retirement system to work, people would need to know when they will die, save 14% of their earnings from age 25, and never withdraw any funds, Mr Pearse said. They would also need to earn 5% above inflation each year on their investments, time withdrawals to last until the day they die and know if they will be retrenched or too sick to work, he said.

This is a lot to ask. "The current retirement system simply defies human behaviour. Basing a system on people’s voluntarily saving for 40 years is like asking your pet dog to save half his dinner for tomorrow."

Old Mutual’s 2013 Retirement Monitor found that 42% of respondents had no formal retirement provision in place at all, while 85% said their greatest concern about retirement was not having enough money. Only a third of respondents knew the rand value of their retirement savings, while 43% knew who managed their retirement find.

Sanlam found that people who earn a salary commit only 7% of their earnings to retirement savings. Similar findings were made in the 2012 Alexander Forbes Member Watch Survey. Its most concerning finding was that the average preservation rate has dropped from 8.6% to 7.8%.

Mr Pearse said companies had abandoned the defined benefit retirement system about 30 years ago as it cost them too much with people living longer. "Thus the corporate world has largely absolved itself of responsibility for its retired employees," he said.

The government has had to step into the breach to ensure sufficient retirement savings, with the Treasury planning to introduce some far-reaching retirement reforms. It has produced five discussion papers on retirement reform and changes to legislation expected to be tabled from 2015.

"South Africa appears to be following the UK model, which proposes creating simple, well-managed retirement accounts, which are mandatory, inexpensive and designed to pay out sustainable income for life," said Mr Pearse.

The retirement industry needs to find ways to remain relevant in this changing investment landscape, he said. "To do this, the industry needs to embrace umbrella pension schemes, lower costs, replacement ratios that give employees a more reliable indication of whether they are saving enough today."