2015: As such, Benefits Barometer 2015:'Financial Well-being' reflected a dramatic shift in focus. Our research on the pension fund industry turned to the plight of the individual trying to manage their own financial well-being. The logic was simple. Until we could stabilise members’ financial well-being, retirement funds and employee benefits were at risk of being cashed in at the first opportunity. The workplace provided an excellent place for engaging with employees and their families about financial stress and their capabilities.
From the employers’ perspective, having employees in financial crisis posed real risks to any company, but the fact of the matter was that most financial wellness and employee assistance programmes were falling far short of the mark of reducing those risks. Benefits Barometer 2015 provided a veritable roadmap to why these programmes failed, what needed to change, and how the financial services industry could step up to provide this critical resource.
The problem, though, was that meeting such a need effectively demanded a complete overhaul of the industry: its business models, its mode of advisory and consulting engagement, and its digital, customer relationship management and administration systems. Getting this right was no longer about selling products, but about nurturing behavioural change. It was about understanding that the average South African retirement fund member experiences a rollercoaster ride in the course of their financial lives, veering from time to time towards debt and potential financial ruin, and then righting themselves and clawing back towards stability. This meant that the industry needed to find a way to finally bridge the gap between the credit-impaired and the creditworthy in the way it serviced individuals. After all, these were for the most part the same individuals and families at different stages in their financial journeys.
Enhancing individuals’ financial decisionmaking skills also demanded a completely new type of product and service offering. It needed to be one that would actually help individuals understand the trade-offs they were making whenever they made a financial decision or bought a financial product. This framework would need to allow them to tailor the product to address which tradeoffs were optimal for them. Importantly, it needed to help them understand the potential consequences of their decisions over a longer term.
But as compelling and convincing as all this sounded, one fundamental stumbling block still remained: how could such a monumental shift ever be funded? Put simply, the cost of the shift could exceed any pay-off time that shareholders of a publicly listed company might tolerate. It could also exceed the funding and distribution requirements of any start-up disruptor.
2016: And then came February 2016. This was the month that government pushed the pause button on some of the retirement reforms. This was such a critical point of inflection for this whole conversation. The debate around issues such as mandatory annuitisation and preservation and whether South Africa had an effective social security net threatened to merge into one potentially explosive issue: Whose money was this anyway that was being allocated to this savings programme, and who has the right to determine what happens to it?
Makhado R Ramabulana, an advocate in the Pension Funds Adjudicators Office, argued in a Business Day opinion piece that “in the debate over the changes to pension funds administration arising from the Taxation Laws Amendment Act, both sides make reasonable points”1. He went on to contextualise the discussion by pointing out that employment and the role of pension funds have changed dramatically since 1956 when the Pension Funds Act was first passed:
Instead of a paternalistic role, where the employer provided a life-long employee with a gold watch and a pension for the rest of their lives on retirement, increasing employee mobility (to say nothing of increasing concerns about the financial risks that funding these liabilities posed to a company) demanded a much more portable solution, one that today is perceived more as a personal savings plan than a retirement savings programme. The shift from the company-centric defined benefit (DB) scheme where the employer carried all funding responsibility, to the employee-centric defined contribution (DC) model, meant that the employer shifted this responsibility by simply accounting for the funding in an employee’s total cost-to-company calculation. What was effectively once a gratuitous company perk has now become a deduction from an employee’s salary package. Considering that it’s not compulsory for employers to offer a pension fund scheme to employees, it’s little wonder that employees began to regard these schemes as sources of accessible savings rather than as inaccessible retirement provision2.