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Low preservation rates are one of the biggest reasons for replacement ratios being lower than the target. Default preservation regulations have been put in place to improve preservation rates by automatically allowing retirement savings to be made paid-up in a fund when a member leaves their employer and doesn’t make a payment election.
This section analyses the proportion of members who preserved their withdrawal benefits rather than taking the benefits in cash.
Preservation rates are calculated for those members who resigned, were retrenched or dismissed by their employer. Preservation rates are calculated on benefits actually paid. This means that members who left before 1 April 2019 but received their benefit afterwards were not included in the calculation of the preservation rate.
The number of members preserving has decreased from 11.5% in 2012 to 8.75% in 2019. The proportion of assets preserved has also decreased from 50.6% in 2012 to 48.39% in 2019.
One of the most common reasons given by members for not preserving their benefits is that their fund credit is too low to warrant the trouble and expense of a preservation fund. A total of 61% of those who chose not to preserve any of their benefits had a benefit of between R0 and R25 000.
However, the other 37% of non-preserving members had already accumulated a significant benefit but chose not to preserve. Individuals should be made aware of the longer-term impact of not preserving even relatively modest amounts at younger ages because of the power of compounding interest.
The graph shows the preservation rates at different age groups by number of members.
Preservation rates increase with age. This may be due to members more aware and focused on their retirement savings and understanding the importance of preserving their benefits.
Preservation rates have decreased on average by 0.36% for members between the ages of 18 and 30 years when compared to the previous analysis. While members who are 65 years and older have increased by 1.82%.
Low preservation rates are one of the main reasons for replacement ratios being lower than the target replacement ratio, between 75% and 100% of pensionable salary.
The impact of retiring at various ages is illustrated below for a new member aged 25 contributing at 11.75% of salary. Deciding to retire at the age of 65 rather than the age of 55 can almost double a member’s replacement ratio.
In the year to 31 March 2019, approximately 134 000 members left the funds surveyed. Of these, 103 700 were resignations, retrenchments or dismissals; 7 230 were retirements and 3 400 were deaths. The remaining exits transferred to their employers’ new funds.
The average exit rates for the year to 31 March 2019 are shown in this graph.
Exit rates have decreased on average since 2018 in the number of resignations. The rate of exits declines as members get older. Most exits are between the ages of 20 to 30 years. There were similar findings in the previous analysis and general industry research.
Even after age 55, approximately 4.05% of members resigned instead of retiring, which may have a significant tax implication for them. This may be as a result of pension fund members choosing to resign rather than retire in order to take their full benefit in cash.
The 2019 Member Watch analysis shows that the average actual replacement ratio at retirement is 26.2%, assuming the member bought a with-profit annuity at retirement. This is a decrease in the average replacement ratio seen in the 2012 analysis of 31.7% and 2018 analysis of 28.8%. Although this analysis excludes retirement savings outside the retirement fund, the low level of preservation means that it is unlikely that many members have significant other savings earmarked for their retirement.
This graph reflects the estimated retirement benefits (the replacement ratio) received by members who retired in the past two and half years.
Approximately 49.7% of retirees in the analysis achieved a replacement ratio less than 20%. This is lower than the findings of the 2018 analysis where 51.7% of retirees achieved a replacement ratio less than 20%. There is an increase of 2.8% of retirees, who achieved a replacement ratio above 80% when compared to the 2018 analysis. The low replacement ratio outcomes may be because of:
This graph shows the fund credit at retirement as a multiple of salary with the replacement ratio achieved. Retirees who had a fund credit of more than nine times their annual pensionable salary managed to achieve a replacement ratio of 60% or more. Members who retired with a fund credit less than four times their annual pensionable salary retired with a replacement ratio of less than 20%.
756 894 members were used for the below analysis, of which 360 778 are females and 396 116 males. Members with a minimum annual pensionable salary of R40 000 were used. Members with a fund credit more than 25 times their annual pensionable salary were excluded.
The graph shows the required fund credit as a multiple of salary to achieve a replacement ratio of 75% at retirement, and the actual average fund credit as a multiple of salary that members currently have at each age.
The required fund credit as a multiple of salary to achieve a replacement ratio of 75% at retirement is 12.22, and the actual average fund credit as a multiple of salary at age 65 is 3.7.
The graph shows the average shortfall in Rands between the required fund credit as a multiple of salary and the actual average fund credit as a multiple of salary at each age. The average shortfall for all the members administered by Alexander Forbes is R1 222 410.56.
The graph shows the total shortfall in Rands (R) between the required fund credit as a multiple of salary and the actual average fund credit as a multiple of salary for different age groups.
The total shortfall for all the members we administer is R558 billion.
The LifeGauge Comprehensive analysis can assist trustees in reviewing the results of their LifeGauge outcome compared to various sectors. It also provides detail within the industry to give guidance to trustees on the fund’s potential outcomes and to support appropriate advice with regards to design.
The LifeGauge Comprehensive provides a comparative overview of the following statistics:
In conclusion, the Member WatchTM provides a high level overview of the trends and, importantly, provides a clear indication of member behaviour. Using the LifeGauge Comprehensive tool, trustees can benchmark their own funds to better understand what levers can be used to improve member outcomes.
In addition, the results highlight how important it is for members to have access to communication and advice to make better decisions over their lifetime to improve their long-term financial well-being.
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