Advertise Here
Icon

Directory

IconAssociations and Institutes
IconBBBEE Consulting and Verification Agencies
IconBenefit Administrators & Investment Managers
IconConsumer Protection
IconCorporate Governance
IconCredit Bureaus
IconEmployee Benefits Consultants
IconFinancial Planners
IconIndependent Principal Officer
IconIndependent Trustees
IconOmbud
IconPension Fund Trustee Liability Insurance
IconPension Fund Trustee Training
IconPension Funds Adjudicator
IconPublications
IconRegulatory Authorities
IconRetirement Advice
IconRetirement Funds registered by the FSB
IconRetirement Products
IconSocial Grants (Government)
IconTrust Establishment & Management
IconWellness Programs
Image
  Subscribe To »

Change retirement fund statements to change members’ thinking

Published

2016

Fri

15

Apr

Presenting retirement fund members with regular statements that set out the value of their fund credits like bank account statements can actually promote incorrect thinking and have the unintended consequence of fostering undesirable behaviour by members.
 
This is according to Shaun Levitan, Executive Director at Colourfield Liability Solutions, who says, “The current investment practice in South Africa, consistent with legislative requirements, is to provide members of defined contribution retirement funds with the value of their fund credit - or account balance - on a regular basis. This information is clearly important but on its own, it is not meaningful. In fact, providing this information in isolation might actually be dangerous.”
 
Levitan cites the example of a retirement fund member who receives a statement showing an accumulated fund balance of R1 million. “Imagine that for some years, this member has believed that R1 million is the target she should be aiming for. On receipt of this latest statement, she therefore believes that she is on track for a great retirement”.
 
“However, the reality is that knowing her account balance in isolation provides the member with no insight into her likely standard of living in retirement. Instead she may have a false sense of comfort over her retirement finances by imagining that if she leaves her job it is acceptable to access some of her fund credit in cash, because she believes she already has more than is ultimately required.”
 
He says it would be more useful for the member to receive a statement from her retirement fund that reveals the following:
  • The monthly income she would receive if she used her fund credit right now to buy a monthly annuity;
  • The amount that such a monthly annuity would increase due to her projected future contributions towards her retirement savings;
  • The final projected monthly annuity at retirement (in real terms), which would be expected to increase annually with inflation.
“These calculations are technical but can easily be done in a transparent manner.  Providing this information to an individual changes the statement from referring to a ‘pot of money’ to that of a stream of income at retirement. It recognises that retirement income – rather than a projected amount of capital - is actually the goal, because the role of a retirement fund is to maintain our standard of living in retirement.”
 
Levitan says such information would empower the member to consider questions such as whether she should be contributing more to her fund to boost her level of retirement income, whether she should work longer than her official retirement age from the fund, or whether she should take on more investment risk.
 
He says that by treating retirement fund members’ accounts in the same way as a bank account, members are inadvertently encouraged to focus on an incorrect measure from their earliest interactions with their retirement provision. “South Africa has among the lowest preservation rates in the world when members move jobs. This is a symptom of a system that holds out the ‘pot of money’ thinking to members on an ongoing basis. However, if the primary focus of communication was instead on members’ retirement income, the desire to access these funds would likely be far lower. At the very least, the implications of accessing their funds would be immediately understood.” 
 
He adds that presenting retirement information to members in this way would not require a significant education exercise on the part of the trustees, the fund or an employer. “People in general already think in terms of consumption. This way of outlining the information allows members to understand their financial situation in a more holistic manner. The fund credit is clearly an important piece of information but it is not imbued with enough meaning when presented on its own.”
 
“Before spending millions of Rands and hundreds of hours on educating members on financial concepts, we should try to interact with them meaningfully. Members understand information when it is presented to them in a way they already think. Communication in this way reinforces that our retirement funds are to provide for our retirement and that they shouldn’t be treated in the same way as a bank account.” 
 
Source: Epic MSLGROUP
 
« Back to previous page Print this page » |
 

Breaking News »

Liberty Drives Hope - and places the needs of ordinary South Africans at the core

                                    It was a desperate cry ...
Read More »

  

Is the Covid-19 e-commerce boom here to stay?

The Covid-19 pandemic has accelerated the adoption of e-commerce in a way no company could have imagined. In fact, in many instances, it has brought 3-5-year sales projections forward in just a matter of months ...
Read More »

  

SOUTH AFRICA FACES WEALTH DETERIORATION CRISIS

How understanding the real value of good financial advice can help   27 July 2020: The Centre for Applied Research (CAR) reported that the global financial services industry is facing a ‘crisis ...
Read More »

  

Art as a store of value in times of crisis

During times of crisis, the appeal of collectible assets like art can intensify. Nervous of the present risks in investment markets, investors will look to include assets with a more consistent store of value in ...
Read More »

 

More News »

Image

Healthcare »

Image

Investment »

Image

Life »

Image

Short-term »

Advertise Here
Advertise Here

From The Glossary »

Icon

Small Cap Funds:

Also called micro cap funds, these seek maximum capital appreciation by investing in smaller companies with a high growth potential. These companies fall outside the top 100 largest shares on the JSE and by nature these funds tend to be more volatile than those that are diversified across the whole of the JSE. New investment by these funds is restricted to small cap shares, and at least 75 percent of the fund must be invested in small cap shares ...
More Definitions »

 

Advertise

 

eZine

 

Contact IG

 

Media Pack

 

RSS Feeds

By using this website you agree to the Terms of Use.
Copyright © Insurance Gateway (Pty) Ltd 2004 - 2020. All Rights Reserved.