First published 25 April 2016
In a former life I used to look forward to the Sanlam Employee Benefits Survey as providing a good overview of company funds including rules, policies, employees education etc. This year’s as reported by Stephen Cranston in the Financial Mail paints a rather similar dismal picture of employee training / interest. Some of the depressing facts:
- 52% of pensioners did not know if their fund had been through a conversion from defined benefit to defined contribution. [I can imagine this could apply to members but not to pensioners.]
- 23% of retirees only became of their retirement benefits at retirement.
- Almost half of retirees relied on their HR people for advice. [Unfortunately it’s also all too easy to get bad advice from a professional financial adviser and HR, while not experts, may be trusted more.]
- Only 5% of pensioners said they had chosen living annuities whereas the true figure was 80%. [That could give rise to some interesting conversations when their funds drop below the level necessary to sustain the level of benefits they might have been used to. What discussions take place when the annual election of drawdown is due?]
- 38% thought they had guaranteed escalation annuities and 23% inflation linked annuities even though both are in fact quite rare. [Living annuities may appear as such until the maximum drawdown rate is not sufficient.]
- As a result 61% of pensioners thought their pensions were guaranteed to maintain their real value but 60% said this was not happening.
Thanks to this appalling lack of knowledge many pensioners may find themselves reliant on the state or their family when the real facts emerge. Some of you received my Excel spreadsheet which allowed you to plug in different rates of investment return, inflation etc to see when your funds would run out if you are not the recipient of a guaranteed pension, or equally how much of a living annuity may remain for your heirs, in nominal terms and at 2016 prices. This is very important in the case of the numerous people on living annuities especially when there is so much uncertainty on returns from equities. Financial advisers may assist but it is so much more practical for the pensioner to run numerous what ifs. Excel is ideal for this – for instance, given a certain level of inflation what investment return would I need to ensure my current standard of living could be maintained for another 15 years (using the Goalseek function). Be careful what inflation rate is used. With food inflation pushing back to 12% or more and medical aid premiums increasing by CPI+≥3% the rate for pensioners can diverge materially from that for the general population