Sanlam survey of retirement fund industry and members reveals:
- Total employer and employee contribution grows to average of 11.3% of salary
- Growing reliance on unpaid trustees
- HIV/AIDS costs stabilising
- Impacts of global economic crisis ‘early days’
- Increasing awareness and apprehension about proposed NSSS

Cape Town, July 2009:

In the face of worsening economic conditions, South African employers and employees are contributing more to retirement. This according to results from the annual BENCHMARK Survey from Sanlam Employee Benefits (SEB), based on interviews with retirement fund members, and retirement fund trustees and principal officers. Now in its 29th year, the internationally respected survey – considered the most comprehensive of its kind in South Africa’s retirement fund industry – provides relevant statistics and insights into the management of pension, provident and umbrella funds, as well as the views of retirement fund members.

Reversing a declining trend, the total average retirement fund contribution made by employees and employers amounted to 11.3 percent of salary this year, up from 10.9 percent in 2008. According to the survey, employees contributed an average of 5.9 percent (versus 5.5 percent in 2008) and employers contributed 9.9 percent (versus 9.5 percent in 2008).

Higher contributions, still insufficient
Speaking today at the BENCHMARK Symposium in Johannesburg, Dawie de Villiers, survey co-author and CEO of Sanlam Structured Solutions, observed: “Interestingly, despite a sluggish economy, more money is being set aside for retirement. As positive as this may sound for those able to save, South African contribution levels are far from what they were in 2002 and well off a recommended minimum of 15 percent.”

Total contributions are an important indicator of whether individual South Africans will have enough to maintain their standard of living when they retire. Calculations conducted by Sanlam show that current contribution levels result in an average replacement ratio of only 30 percent. (A replacement ratio is a measure of one’s income during retirement relative to that enjoyed during productive years.) Given this low figure versus an average of 59 percent for mandatory savings and 68 percent for voluntary savings among OECD (Organisation for Economic Co-operation and Development) countries, as well as South Africa’s high levels of unemployment and poverty, the BENCHMARK survey indicates that the majority of South Africans are not adequately preparing themselves for retirement.

“We hope that the increase in contributions is a continuing trend and the result of government and industry’s efforts to communicate the importance of savings,” commented de Villiers. “Recognising this improvement might be a response to the global economic crisis, we trust that it is mainly due to more South Africans taking a prudent longer term view of retirement.”

Trustees trusted, not paid
As trustees are better trained and more communication with retirement fund members occurs through face-to-face meetings, SMS and newsletters, members are increasingly relying on trustees to make investment choices. Ironically however, when asked to name a trustee for their fund, about three quarters (72.7 percent) were unable to name one and a similar number (76.2 percent) had not participated in the elections of a trustee for their fund.

Despite this, an increasing number of members (52 percent) approach trustees with retirement fund related queries (up from 42 percent last year). Although trustees have more responsibilities, 91.5 percent of them receive no remuneration (versus 79.5 percent in 2008) and 85.5 percent of funds now have a policy which restricts or prohibits trustees accepting gifts, up from 58.5 percent last year.

“Trustees, currently faceless and nameless to most members, have an important relationship to establish and maintain with members,” added de Villiers. “In an environment where half the stand-alone funds (52 percent) are offering member-directed investment choice and members have more opportunity to change their investment options, being a trusted and active advisor is more important than ever. This is absolutely critical given that of these members, 64 percent rely on the default option for investments.”

Trust relationship ends post-retirement
Whilst 75 percent of funds provide pre-retirement counselling, after retirement, 86 percent of trustees have no further involvement with members. According to the trustees surveyed, the most popular retirement options include living annuities (40 percent), guaranteed fixed annuities (27 percent) and with-profit annuities (21 percent).

“Ironic and unfortunate, retirement members are reliant on trustees’ investment decisions to sustain them during retirement, yet trustees do not seem to maintain established relationships once members retire,” added de Villiers.

Contributions / Costs
Whilst contributions to retirement funds have increased, so have costs. Administration and operating costs have grown to 1.3 percent (up from 1.1 in 2008) and death benefit premiums have increased to 1.9 percent (up from 1.7 percent in 2008), whereas disability benefit premiums have remained flat at 1.3 percent. One of the contributing factors to the rise in administration and operating costs appears to be a trend of funds moving from monthly to daily pricing, with 45 percent of them now placing daily benefit statements online. In addition, the average death benefit is now 3.5 times annual salary, up from 3.2 times annual salary in 2008.

“As the industry considers costs against the need for effective member communication, ongoing trustee education and more frequent investment status updates, it faces a difficult balancing act,” added de Villiers.

HIV/AIDS costs stabilised
In terms of HIV/AIDS management, the percentage of employers with programmes in place to manage the disease, including awareness campaigns and counselling, has plateaued at 69 percent. The proportion of employers providing HIV/AIDS testing, however, has grown to 83 percent, up from 67 percent last year. Encouragingly, the costs to manage the disease seem to have stabilised. Over the past three years, the proportion of funds that have seen an increase in HIV/AIDS risk costs has declined to 12 percent, versus 16 percent in 2008 and 22 percent in 2007.

“This declining trend is likely due to the establishment of disease management programmes, particularly among larger funds, and employer-provided testing, as well as greater insights into costs of the disease and associated risk benefits,” observed de Villiers.

Lower, but positive investment returns
Almost one third of funds (31.5 percent) reported investment returns between 0-10 percent this year, significantly lower than the average return of 20 percent last year, and almost one third of funds (30 percent) reported negative returns. Looking ahead, 31.5 percent of industry respondents expect investments returns for 2009 to be lower than 2008, but still positive. As far as offshore investments go, 41 percent of funds have either applied or plan to apply for an exemption to exceed the current 15 percent cap on offshore investments.

Impacts of global economic crisis
Whilst only seven percent of funds had a “large exposure” to so-called toxic assets (both locally and internationally), 88 percent of them expect their investment returns to be negatively impacted by the global economic crisis, of which 36 percent expect a “large” impact. Interestingly, more than 50 percent funds indicated that they will not be changing their credit exposure conditions for their assets and 34 percent are considering doing so or unsure.

“Although in its early days in South Africa, the ramifications of the global economic crisis are still to be fully realised,” commented de Villiers. “Fortunately, those in the industry and everyday South Africans are confident in our financial institutions to weather what will be a rough storm.

Confidence in SA financial institutions
Among retirement fund members surveyed, a respectable majority (57.5 percent) are confident the local financial services industry will endure the crisis, whilst around one quarter (24.7 percent) are unsure. Similarly encouraging, 87 percent of respondents to the industry survey believe that the local banking industry is stable and secure relative to its global peers.

Savings important, confident members
Among retirement fund members surveyed, 96 percent rate savings as very important and a respectable 58 percent consult a financial advisor. As far as ensuring consistent savings, 48.2 percent of members prefer being compelled to be on their company’s retirement fund and if given the choice, an overwhelming three quarters (76.8 percent) indicated they would not reduce their level of contribution to retirement savings. Equally positive, most members (78 percent) plan to preserve their benefits if they exit a job, either voluntarily or involuntarily. Members also feel confident in exercising an investment choice once they begin saving, with 67.7 percent indicating that they have sufficient knowledge to make informed choices, up from 58 percent in 2008.

Uncertain recovery and retirement
In the context of the current economic climate, 48.5 percent of members think they will have enough time to recover from the economic crisis before they retire, while a troubling 23.2 think they will not and a 28.3 percent are unsure. When asked if they are “more or less prepared for retirement” given the current economic crisis, 40 percent say they are, 40 percent admit they are not, and 20 percent are unsure. In terms of what they plan to do if they do not have enough money at retirement, more than half plan to re-employ themselves either by negotiating a contract with a previous employer (26.3 percent) or finding a job (27.7 percent), whilst almost a third (31.3 percent) plan to lower their standard of living and 15 percent are unsure.

NSSS: more awareness, apprehension
When it comes to the government’s proposed National Social Security System (NSSS), almost half (47 percent) of retirement fund members surveyed were aware of it (an increase of almost 10 percent on 2008). Unfortunately, considerably fewer of them feel positive about the NSSS, with 26.2 percent having a favourable view versus 35.5 percent in 2008. More importantly, there appears to be a large increase in ambivalence, apathy or confusion about NSSS with the majority of respondents (52.8 percent) not sure how they view the proposed legislation, versus 34.3 percent 12 months ago.

Touted by government as a mandatory system, only eight percent of retirement fund members surveyed think NSSS should be compulsory for all, almost one quarter (23 percent) feel it should be compulsory for everyone earning below a certain income threshold and the majority (56 percent) believe that there should be an option to opt out.

“There remains considerable apprehension in the industry and among retirement fund members regarding the NSSS, now scheduled for a much delayed implementation,” noted Elias Masilela, Head of Corporate Affairs and Retirement Reform for Sanlam. “Whilst awareness of NSSS may have improved – presumably due to wide-ranging discussions and debates on the proposed legislation, across the country – the current economic crisis makes it increasingly difficult for the marginal consumer to save comfortably. Moreover, the crisis is likely to stretch the fiscus beyond what government has envisaged, possibly slowing the implementation of retirement reform.”

Member communication and fund governance
Communication with retirement fund members is improving, with more than half of funds (52.5 percent) communicating to members on a quarterly basis, mainly in the form of a personal letter (40 percent) or a fund-specific newsletter (32 percent). Despite the fact that 62.5 percent of funds have an Intranet or Internet facility, less than two percent have indicated that the website is used as means of communicating with members. This seems to imply that websites are used mainly as information repositories for members to access for specific fund documents, rather than as two-way communication platforms. In terms of fund governance, 80 percent of funds now have an investment policy statement in place (versus 67 percent in 2008).

Ends.

About the 2009 BENCHMARK Survey
The 2009 BENCHMARK Survey was conducted by the independent market research consultancy BDRC. The industry portion of the research took the form of face-to-face interviews with principal officers representing 200 retirement funds and 100 employer representatives of umbrella funds. A random sample of respondents was selected to reflect the South African retirement fund landscape, including small (less than 100 members), medium (100 - 500 members), large (501 - 5000 members) and very large funds (5001+ members). Industry respondents included pension (31 percent) and provident funds (58 percent) structured on a defined contribution basis, as well as participating employers in umbrella funds. The member survey of the research involved telephone interviews conducted during April and May this year with 600 retirement fund members (59.7 percent in pension funds, 24.8 percent in provident funds and 13.8 percent a hybrid of the two).

About Sanlam Employee Benefits
Sanlam Employee Benefits specialises in the provision of risk, investment and administration services to institutions and retirement funds. Focused on meeting the unique needs of its diverse clients, SEB assists companies create and deliver customised employee benefits solutions, including the collection of premiums and communication to fund members. For more information, please visit www.seb.co.za.