Retired actuary Donald Fabian’s criticism of the financial services industry for making executives and intermediaries wealthy at the expense of ordinary people should not be brushed aside lightly. He worked in the industry for 40 years, including a lengthy stint in South Africa, and was known by many as the doyen of actuaries in the 1970s and 1980s.
In a rare article in 2003, Mr Fabian did not mince his words when he said he had problems with some of the significant changes in life assurance and pension provision over the years. Replacement of defined benefit by defined contribution pension funds in the eighties was one of the most significant issues raising his ire.
The increased investment in equities by insurance companies and pension funds, he said, may have brought unforeseen prosperity to many individuals and companies, but it also provided “the seeds of destruction” of the with-profits policy (insurance contracts that participate in the profits of life insurance companies) and the defined benefit pension fund.
Mr Fabian may have been outgunned by big pension houses in the end, but it was interesting to see Alexander Forbes, in its latest Pensions Index research report, calling for a “defined benefit mindset in a defined contribution fund”.
Rather refreshingly, the Alexander Forbes report says it seems that the defined contribution experiment has not been as successful as stakeholders thought it would be. The statistics do not lie and the latest Member Watch survey from Alexander Forbes showed that retirees of the Alexander Forbes Retirement Fund, an umbrella fund made up of more than 200,000 members across all economic sectors, achieved an average replacement ratio of a paltry 21%, which is far below the replacement ratio target of 75% that most funds employ.
Remember that defined contribution funds have fixed contribution amounts, but unlike defined benefit funds, benefits are not fixed, and the jury is out whether such a radical shift has ultimately been good for pensioners, especially as so many people simply cash in pension money when they change jobs.
The MD for research and product development at Alexander Forbes, John Anderson, says there is no reason why a defined contribution fund cannot provide a pension that is comparable to that provided by a defined benefit fund.
He says the contribution rate that will get members to the required 75% of salary replacement level in retirement must be determined. There must be a plan to do this (which can be drawn up with the help of a financial planner) and money must only be spent in retirement “in a sensible way”.
His major concern is that “nine out of 10” people are still cashing in retirement savings when they change jobs and, even in areas where people should know better, like financial services, preservation rates remain very low. “We expect jobs mobility to continue, but it might not be where we were five years ago.”
Dave Crawford, of Crawford Employee Financial Guidance, favours far more education on retirement by funds for members, more interaction with advisers to come up with proper plans, and tools to provide regular updates on whether planning is on track.
“One of the problems with retirement planning is that most people don’t understand the pernicious effects of inflation. There is a need for a simple measure that can be understood by almost anyone and that will give them a year-by-year assessment of how adequate their retirement provision is.”
But Mr Crawford cautions that individuals are responsible for their own retirement provision, come what may. “Advisers can only advise — they take no responsibility for results.”
The head of guaranteed investments at Sanlam Employee Benefits, Danie van Zyl, says half of all pensioners deplete lump sums within two years, and the same proportion cannot meet their expenses during retirement. “This means pensioners have to continue working or rely on family. This is why it is crucial to start saving for retirement early — on day one of your first job. This is where an employee’s journey to a successful retirement starts and the employer can help put the employee on the right track.”
Another important factor is that employees should preserve their retirement savings if they change jobs. “Many people tend to job hop and, when they do, cash in their retirement savings. This can erode a large amount of savings.”
Source: Business Day Live