Partnering with the right umbrella fund can reduce the inherent conflict between saving for retirement and spending on more pressing day-to-day expenses. Katherine Barker, Head of Momentum FundsAtWork, says that this conflict, which inevitably impacts negatively on retirement outcomes, can be lessened by proactively encouraging certain pre-retirement behaviour.
The South African Savings Institute (SASI) recently launched National Savings Month 2018 which runs for the month of July. The theme this year is “Employer-Assisted Saving” and SASI has challenged employers to encourage their employees to save more.
Barker supports this call: “Saving for retirement via their employer’s retirement arrangement is often the only form of savings many South Africans have. Currently, however, around 90% of employees cash out their retirement savings when changing jobs. If this low level of preservation persists, the average member faces a retirement income which is less than 10% of their final salary.”
While the inherent cost-efficiencies of umbrella funds help to increase replacement ratios, much more needs to be done to close the retirement savings gap. Barker says, “The right umbrella fund is a highly flexible, integrated solution in which all parts work together to enable and encourage pre-retirement choices that boost retirement outcomes. Financial advisers are pivotal in this process, using the fund’s ‘building blocks’ to bring to life a ‘best advice solution’ to each client.”
Informed decision-making at resignation is critical to improve preservation levels. This is why members of the FundsAtWork Umbrella Funds have access to a ‘smart exit’ process when they resign from their current employer.
Barker explains: “Smart Exits offers interactive scenario analysis, showing members alternatives to help them realise the impact on their retirement if they choose to take their retirement savings as a lump sum and spend it. The intention is that clearly showing this information will motivate more members to remain invested when they realise the potential tax liability of cashing out and the impact it will have on their final retirement benefit.”
Flexibility in terms of retirement contributions and insurance benefits can also help direct more money towards retirement savings. For example, the right umbrella fund should offer the functionality that makes it easy for members to automatically increase their annual contribution rate or make additional voluntary contributions. Barker says increased preservation, coupled with umbrella fund efficiencies and flexible contributions, can push average replacement ratios up to 50%.
Furthermore, flexible insurance benefits that can adjust based on a member’s changing needs, reduce over-insurance and facilitate the flow of more money to retirement savings.
Umbrella funds offering reward programmes are able to encourage healthier choices which in turn lead to improved physical health and lower medical expenses and insurance costs. This releases more money into the pool in which day-to-day expenses compete with future savings. However, Barker says the real power of these programmes is when the reward structure integrates with benefits, so that members’ healthy behaviour generates financial returns that can be channelled to retirement savings.
Barker concludes: “Turbulent times and tough economic conditions mean day-to-day expenses are competing even more aggressively with future savings. Choosing the right umbrella fund will encourage behaviour that bolsters retirement savings and improves outcomes.”