There are many challenges to face during a persons retirement savings journey, and this needs to be considered when designing retirement benefit and savings schemes.
The South African retirement fund market has for some time been mainly defined contribution-based, with members taking the risk if investment returns are less than are required to build up sufficient resources for retirement. And studies find that members are not building up sufficient resources to maintain their standard of living after retirement. It would be easy to link these two statements and deduce that poor investment returns are to blame for poor member outcomes, but this would be a fallacy. There are many reasons why retirement is “not working”, and investment returns have not been one of the main culprits in recent years.
Investment returns
For some time now, we have been talking about the realities of a low-return environment, but that hasn’t been the case over the past 15 years when the FTSE/JSE SWIX earned a 13% annualised real return, the All Bond Index a 4% annualised real return and the FTSE/JSE SA Property Index a 14% annualised real return.
These are great investment returns and should have translated into huge fund credits that would enable people to buy annuities that would be sufficient for their retirement needs. However, this has not been the case, with studies finding that only 6% of people can retire with sufficient resources to replace a high proportion of their salary after retirement.
Targeted vs actual net replacement ratios
A lot of defined contribution funds set up investment strategies that set out to target a net replacement ratio (NRR). The NRR is the income after retirement that a member can expect to purchase using their fund credit, expressed as a percentage of their pre-retirement income.
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Esta historia es de la edición 25 October 2018 de Finweek English.
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