What do employees need most?

If people aren't saving for retirement, how could we reframe the discussion?

• Making long-term savings compulsory is problematic for people living on the financial edge if a portion of their savings isn’t applied to a low-cost emergency savings vehicle.
  
  Employers could facilitate such a solution. It would still provide adequate retirement savings without requiring that employees sacrifice more of their take-home pay if the retirement savings component is auto-escalated. (For more information, see Benefits Barometer 2018: Case study on emergency savings.) But typically, most pension fund trustees would not have a have a mandate to create such a solution.
   
• When members are given a choice of how to apply their compulsory savings, this provides the added value of increasing financial literacy and fiscal responsibility.
  The Singapore model is an excellent case in point. In the Singapore model, once a minimum retirement saving sum is addressed, tax-free savings can be applied to housing, education, health, risk and investing for the benefit of the individual or a multigenerational family. (For more information, see Benefits Barometer 2016: A better model of employee benefits.) Singapore now ranks at the top of the lists on financial literacy of its citizens. 
   
• If the financial services industry and governments want these long-term savings to endure, there needs to be a focus on helping income earners manage their entire financial journey – not just their retirement.
  
  There needs to be a vision for every employee to visualise what the future will look like. Historically the industry has only been offering financial planning advice to high net worth individuals. Technological advances now mean that compulsory savings can now be refashioned into a guided financial planning framework for all members, including their extended families or lenses of responsibility. That will be the dramatic shift that Africa, its employers and its governments will need to take to secure its future.

We recognised that the Singapore model for compulsory savings probably represented a ‘bridge too far’ for most African governments – particularly as it typically asked employees to save as much as 40% of their income. But we conducted an interesting experiment in South Africa: we asked what would happen if employers used its buying power to provide employees with access to financial services that reflected the same sort of low-cost opportunity set that was afforded to Singaporeans. For lower-income employees who would be less impacted by the tax advantages offered in compulsory systems, the results certainly should give employers pause for thought.

1. Solving for all goals at the same time requires 80% of income.
2. Integrated lifecycle savings solution requires 43% of income at a point in time.

In our example here, simply by maintaining a disciplined savings programme that provided employees with access to lower-cost financial services, a 23-year-old male with a starting salary of R72 000 a year was able to:

• achieve a 50% replacement ratio on his retirement savings
• build and maintain an emergency savings fund of three months’ salary
• provide a full education (from age six up to tertiary) for his two children (born when he was 25 and 27)
• and fund and pay off a starter house with a real value of R250 000 within 20 years

Had the same employee tried to access these basic financial services without the benefit of the employer’s buying power, the total would have consumed more than 80% of his income. More importantly, by helping the individual address the funding demands of their economic journeys, we have probably done more to shore up the foundations that absolutely need to underpin any retirement model. This will be the demand for the future of Africa. When we begin to understand the implications of these outcomes, it certainly suggests that we need to re-engage with regulators on what outcomes are the most critical issues in a compulsory savings model.