Predictive analytics tools used on the Member Watch data have identified five key factors that affect the level of preservation.
These factors are:
Size of the fund credit
The higher the fund credit at exit, the higher the probability of the member preserving their retirement savings. This affects the amount of tax that will be paid, which acts as a disincentive for members to take their benefit in cash. Fund credit size is also correlated to the length of pensionable service and salary. Other factors include the monthly pension that members can buy with the retirement lump sum. If members feel that the monthly pension they can buy at retirement is too low, they are more likely not to preserve.
Industry sector
Some industries have a higher average preservation rate than other sectors. Industries with high turnover rates and very high resignations tend to have very low preservation rates. The level of financial literacy within the industry is also a factor.
For example, in the retail sector where people change jobs more frequently and there are more contract workers, the members are more likely to take their benefit in cash.
Exit type
The exit type also has an impact of the likelihood of preservation. The data shows that the highest rates of non-preservation are on resignation and early retirement. The reason for the exit is also often correlated with the member’s financial situation. Members without emergency savings or who are highly indebted are more likely to take their retirement savings in cash.
Access to financial advice
Access to financial advice has a significant impact on the level of preservation. Members who have access to financial advice have higher preservation rates.
Whether the fund offers a preservation solution
The analysis shows that when members can preserve in a fund-supported preservation solution that is easy to access and institutionally priced, the preservation rate is higher.
Recommendations
The default regulations aim to improve outcomes for members by ensuring they get good value for their savings and retire comfortably. The regulations require funds to implement:
- default investment portfolios
- default preservation rules
- an annuity strategy
- retirement benefits counselling
To encourage preservation, the default regulation requires funds to offer a default in-fund preservation which allows members to leave their retirement savings in the fund when they:
- leave the employer; and
- the member does not elect how the benefit should be paid
The following interventions are recommended to assist members in decision-making:
- Show members the impact of the decisions they make. The Alexander Forbes Preservation Pro tool allows members to see the long-term effect of their decisions when withdrawing. The tool shows people the benefit they forgo at retirement when they take their fund credit in cash when withdrawing from the fund. The tool also shows the additional contributions that will be needed and how much later the member will have to retire if they want to achieve the same level of income in retirement that they would have received if they had decided to preserve.
- Make financial education more accessible for members through an employee assistance programme.
- Availability of in-fund preservation. Exiting members now have the option of in-fund preservation.
- As per regulation, retirement benefit counselling must be made available to members:
- before their benefits are taken in cash or transferred
- at least three months before members’ normal retirement date
Preservation options are unlikely to succeed if the underlying issues that people face like reducing debt, managing monthly and unforeseen expenses and increasing their savings rate are not addressed. A financial well-being programme may be needed to achieve these objectives.
In addition to these interventions, Alexander Forbes is able to perform an analysis for an employer to identify the financial stress levels and related behaviours and their impact on payrolls.