The possibility that government may interfere with the pension industry will have a devastating impact on the retirement industry and add further pressure on pensioners who are already struggling to make ends meet.
In its election manifesto, the ANC indicated the intention to prescribe to local asset managers to invest in struggling state-owned enterprises, such as Eskom and SAA.The prescribed assets policy will enable government to access ordinary South Africans’ savings and pensions. This will significantly weaken pension fund returns.
This move is nothing more than a form of taxation or redistribution of wealth to get even more money for government spending. This means that pension fund members have to face the music and compensate for government corruption with their hard-earned retirement money.
Golden years may be cold years
Retirement savings are not just about how much you invest. What is critical is how your retirement capital is managed. For most South Africans, their retirement fund is their biggest, if not their only, investment, and any irresponsible investment decisions will be reflected in their old age.
As it is the vast majority of South Africans are not able to retire independently. It is estimated that only about 6% will be able to do so. If the government succeeds with their latest plan, the percentage will decrease even further. People will be discouraged from saving for their retirement and could lose faith in pension funds.
Financial sins in retirement
Many people will react by withdrawing their maximum monthly amount from their pension funds or similar retirement funds if the fund managers are obliged to make poor investments. It contradicts the golden rule that you should stay invested as long as possible to enjoy the benefit of compound interest/growth.
Compound growth is known as the eighth wonder of the world and influences long-term investment (such as a pension fund) significantly.
Withdrawals, without reinvesting again, negatively affects the pension fund’s value upon retirement and are the reason why so many people do not enjoy the real effect of compound interest.
Old but not cold
Our life expectancy is much longer today than it was several years ago. Half of men who are currently 60 years old, will reach the age of 85. Women aged 70 today could live up to the age of 93. Long lives require substantial investment to be self-sustaining. Many retirees underestimate their life expectancy and believe their funds are adequate, only to be disappointed later.
South Africa is not unique. Worldwide, life expectancy is rising. The growing ageing population, as well as the financial need of most retirees, mean that the pool of people who are dependent on a state pension will only grow – which will become a major challenge for the government.
Government can no longer care
The guaranteed pensions of the past, no longer exist. You need to look after your own interests today and make sure your funds are adequate. Have you saved enough capital to survive when you retire?
How does the state manage its own pension fund?
The State Pension Monitoring and Promotion Association says the fund (the largest in the country with 1.27 million active members and 450 322 pensioners) has an estimated long-term financing deficit of R469 billion. The cash inflow in the 2018 financial year could not fully cover the disbursement of fund benefits. The last actuarial valuation was in March 2016 and the fund is silent on why the valuations have not been settled in time.
The fund made high-profile investments such as Steinhoff and the bankrupt VBS Mutual Bank, and Eskom, Denel, Sanral and the bankrupt Isibaya projects were funded at will.
Retirement must be planned and purchased
Retirement can only be purchased and provided for when you are younger and still generating an income. A safe rate for retirement provision is 25 times the income you want as a retiree. If you want to receive a pension income of R200 000 per year as income, you need to invest 25 x R200 000 = R5 000 000.
Road to retirement not easy
Remember that the road to retirement is not always easy. It is accompanied by many sacrifices, but the destination will ultimately make it worthwhile.
The consequences of our decisions are usually only experienced later. That is why it is so important from the outset to plan, make wise decisions and adjust if the tide or regime changes.