As a concept, retirement is a relatively new thing. Its roots can be traced to Otto von Bismarck and Germany in the late 1800’s where he introduced a disability insurance programme for anyone over the age of 70 (there were not many) and in reality it was just an attempt by him to retain the loyalty of the workforce. The first private pension fund was introduced around the same time by American Express in the US and shortly after this the first union pension fund was introduced. The uptake was initially slow but from 1910-1920 as favourable tax regimes were introduced the number of funds quickly grew to more than 200. By 1932 about 15% of the US workforce was covered.

Then came the “great” depression and in 1933 with 25% of the US population unemployed, 50% of the elderly living in poverty (many of the private pension funds collapsed) there was a growing call for the elderly to demand pensions from the government. They (the government) quickly responded and in a move that was mostly an attempt to maintain political power and control, FD Roosevelt and the new Dealers introduced the concept of enforced retirement. This was largely in an attempt to get rid of an ageing workforce and in doing so to make way for the young unemployed masses, thereby getting them off the streets and stop them from rioting as they had done in Germany and elsewhere. The plan to fund this was simple: get the younger members working and then use their taxes to fund the pensions of the older retired workers.

All that needed to be decided was the age of retirement. There were global precedents ranging from 60 to 70 (as well as the biblical notion of “three score and ten”). When they initially agreed on the age of 65, life expectancy in the US was around 63. In the 1930’s, if you reached 65 you were considered really old – kind of like today’s 95+ brigade. In reality, most people were set to die before they retired and the age was quickly reduced to 62 years. So, in theory at least, you retired at 62 and then spent a year in retirement getting your affairs in order before you then “checked out” for the last time.

Today, especially with the advancement of modern medicine, it is not uncommon to find people spending more years in retirement than they did working. Someone who retires today at 55 has saved for 35 years (max) and then possibly needs to fund the next 35-40 years from this saving. No wonder 9 out of 10 people will not be able to retire financially independent! It is not only that they have not saved enough but also that retirement was never meant to be that long. The odds are fully against us – how can you fund 30+ years (with all those deferred goals and with rapidly increasing medical costs) when you only have 30-40 years to save for it? Nope, I think we have it wrong and so do a growing number of well-respected financial planners.

But let’s go back to the early 1900’s for a bit. At that time there was a widely held view that the aged could add little value to society – part of this perception can be attributed to William Osler (so called father of modern medicine) who in his famous “fixed term” speech in 1905 stated that anyone over the age of 40 should be retired and that men older than 60 should be cholorformed. “Take the sum of human achievement in action, in science, in art, in literature – subtract the work of the men above forty, and while we should miss great treasurers, even priceless treasures, we would practically be where we are today. . . The effective, moving, vitalizing work of the world is done between the ages of twenty-five and forty.”

While his speech may have been partially tongue-in-cheek (he was 60 at the time) there was a growing perception that older people could no longer add value to society. Fortunately we (mostly) no longer think this and there are a growing number of older professionals still (happily) working – like the 87 year old doctor I met who was still studying (much to his son’s distress because he thought his dad should have retired already).

Life’s about balance they say and traditionally this has been about being a loyal and hard-working employee in order to earn money that you might be able to enjoy later. We’ve been encouraged to save our money and defer our dreams until one day when we have the time and money to do them. The “New Retirementality”* is shunning this idea and is opting to play now and then work longer. You might never get to retirement and if you do, you might not have your health or partner to enjoy it so let’s rather enjoy our money now (within reason) and work longer. The benefits are many-fold, here are just two:

1. We get to do the things we want to while we still can and with the people we love, and

2. It takes away the pressure to have a massive retirement pot to fund the unproductive years – with the power of compounding an extra 5 or 10 years of saving makes a substantial difference to the size of the pot eventually available.

People are also starting to realise that retirement is not just a financial event – rather it is a life event and if not dealt with on this basis it could have significant and far-reaching consequences. It is not uncommon to hear of people dying soon after retirement or even to find that many relationships come to an end as well. A person’s sense of self-worth quickly declines when there is no longer a purpose/reason to live. A decline in health and relationship stress often go hand in hand with this loss of purpose too.

So let’s accept that most of us wont be able to stop working at 65 and make peace with the fact that we will work longer…just make sure that if that’s the case that you enjoy doing what you do. If not, then find something that you love doing and that you can do for longer. Just make sure that you take time before then to stop and smell the roses along the way.

Retirementality* – this is taken from Mitch Anthony’s excellent book called the “New Retirementality”

This article was first published in Finweek – 25th Nov 2011

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3. The future of RA’s looks bleak…

I cant understand the motivation behind treasury and the FSB’s latest (very zealous) implementation of the regulation 28 rules that apply to retirement funds.

These rules have a whole host of unintended consequences, not least of which, will probably be that RA’s are no longer used as savings vehicles and especially by younger people.

First a brief bit of background:

The Prudential Investment Guidelines (PIGS) are part of Regulation 28 that has been applied to pension funds and how the assets can be invested. Without getting into too much detail, the past rules stipulated that in terms of PIGS, funds could have a maximum equity exposure of 75%, property and equity was limited to 90% with the balance of the funds being invested in the other asset classes (bonds and cash). Typically “pension” funds have tended to sit with around 65% in equities, 10% in property and the balance of the assets in bonds and cash. On top of this, funds were allowed to have up to 25% of their assets invested offshore.

Now most companies tended to allow individual investors to do as they please so long as the fund as whole complied with the regulations. In practise this meant that because some investors were more conservative and had most of their money in bonds and cash, others could be more aggressive with some investors (typically the younger ones) having 100% in equities. The same applied to the offshore exposure. This seemed to work fine for just about everyone. Or so it seemed…

However, recently, the national treasury and the FSB saw fit to amend Regulation 28 (I still cant figure out why) and the worst part of the amendment seems to be that they want each individual member to comply with the legislation with some talk of them even forcing members to comply. This could mean that the companies would be forced to switch some individual members funds until they comply (that could be a legal nightmare). Talk about big brother watching you!

Going forward, 2 of the unintended consequences that I can already see are as follows:

1. Anyone who has an existing RA will have to make sure that it complies with the regulations before they can add to it (this will even apply if they want to increase an existing debit order). Practically this will have the following effect: I have an existing RA where the equity exposure has grown to 78% and the offshore exposure is sitting at 30% of the fund. I am happy with this but I will now not be allowed to add to this RA fund unless I reduce the equity exposure to 75% and the offshore exposure to 25%. Now there will certainly be times when this might be appropriate but there are also times when investors will not want to reduce equities or their offshore exposure (for example when the market is weak and the rand is strong – it would be a classic case of buying high and selling low – and this enforced on us by the regulators!). The practical solution will be to leave the existing RA as it is and start a new RA at a different company. This exercise could be repeated each time investors want to add to their RA’s and it is not inconceivable that they could end up with 10-15 different RA’s at 10-15 different companies over the years – this is an admin nightmare for everyone.
2. A second unintended consequence will be that younger investors who up until now have been able to invest 100% in equities will now shun RA’s in favour of discretionary funds where they can determine their own asset allocations. Sure there are no tax deductions and they will probably end up accessing the funds before they retire but that’s what you get when you try to force an inappropriate situation onto people. Why should a 30 year old investor with 35 years to go until retirement not have 100% in equities if she wants to?

I cant see why the new regulations have been introduced and more specifically why they seem hell-bent on enforcing them at individual investor level – it is certainly not about protecting investors from themselves – under the new rules, it is now possible to have 75% of your fund in equities and the remaining 25% in property – that is certainly not lower risk than the previous guidelines and will certainly mean more volatility for anyone who opts for this route. So what are the real intentions behind this all?

In our practice, we are very close to advising investors to stay away from RA’s until they are ready to retire – at retirement age they could transfer their discretionary assets into an RA. Under current legislation this would have multiple tax benefits for them.

Is anyone at treasury or the FSB listening to investors?

This article appeared in Finweek on 14th October 2011

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There are currently more than 15million South Africans who receive some form of State Social grant. Clearly this is not sustainable but more concerning than these figures is the perception that if one saves and acquires “wealth” during one’s working life then you will not qualify for a state pension. Something is seriously wrong when people are discouraged to save for the sake of receiving a pension of R1140pm.

There is currently fairly complicated way of working out who qualifies for state grants. For an old age pension (for 2012 tax year) it is as follows: anyone earning less than R13680 (R1140*12) per annum will qualify for the full pension. The pension decreases proportionately as the income rises and anyone earning more than R44880 pa would not qualify for any old age pension. In addition to this there is an “asset” test and anyone with assets of more than R547200 (excluding the value of their house) would also not qualify for a pension*.

Clearly there is a lot more education that is required – people need to be encouraged to save, even at the risk of not qualifying for an old age pension. The current situation, just like defined benefit pension schemes, is not sustainable. More people are living longer and there are not sufficient new members entering the “scheme” to continue to cross-subsidise the elderly. Something’s got to give – and it cant continue to be government!

Note: R547000 invested into the RSA Retail Bond (2 years at 7.25%) would currently generate about R3300 pm and would still allow someone to qualify for a partial grant. R44880 pa equates to around R3740 pm. In addition to this it is my understanding that any money in a retirement product is not regarded as an “asset” and so workers should be encouraged to save into retirement products…even R1million in a living annuity with an income draw of 2.5% would still provide an income that is below the current old age pension threshold and would still allow pensioners to qualify for state assistance.

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The Financial Services Board is also struggling with a significant backlog in their case loads and are unable to meet their own turnaround times (especially in the Section 14 transfer department).

What is clear from these stats is that:

1. There is a significant number of complaints being received by the PFA (which in turn means there are some serious issues with the way that many retirement funds are being run and probably means there are some more “scandals” on the horizon),
2. Both the PFA and the FSB are not able to deal with their respective workloads and appear to be significantly under-staffed. As a result, the people that they are there to serve and protect (investors) are being prejudiced.
3. If you have a complaint about the regulators (FSB or PFA) there is nowhere you can turn.

So who regulates the regulators…?

Attempts to contact the FSB today have proved fruitless…the website is down as are their telephone lines.

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Just read an article online about how in these tough times one of the positive outcomes is that people seem to be investing more into their retirement funds. The bad news, though, is that it is still usually too little to enable most people to retire financially secure.

Of bigger concern for me, however, is that not only are most people contributing too little, but on top of this, most people are probably not taking enough risk on their funds. This has mostly to do with the fact that most funds are completely inappropriately named or labelled.

For example, where there is individual fund choice within a pension fund, there are usually 3 or 4 funds such as the “Aggressive Fund”, the “Balanced Fund”, the “Conservative Fund” and possibly a guaranteed or money market fund. On seeing the word “Aggressive”, most investors usually panic and run for the relative safety of the Balanced or Conservative Fund (after all this is retirement money so they don’t want to risk it). Balanced Funds in this context will usually have ±50% in equities with the Conservative Funds having even less. Now we know that the best way to beat inflation (over time) is to have exposure to equities. So while they will probably not lose too much in the down cycle as a result of this choice, they will most probably also not benefit sufficiently in the up cycles.

The problem, you see, is in the names of the funds. Remember that in terms of the investment guidelines for retirement funds, you can never have more than 75% of the total fund invested in shares*…so how can that ever be an “Aggressive” fund? In the unit trust industry, funds with 75% in equities are usually referred to as Managed or Balanced Funds. So why the inconsistency in naming when it comes to pension funds?

As a result of this inconsistency, my suspicion is that not only are people not saving enough money for their retirement, but on top of this, they are also being too conservative with their fund choices and as a result of this they will have even less than they expected when they retire.

Bottom line is that if you have time on your side (at least 12-15 years before retirement) you should most probably be in the most “aggressive” portfolio that you can – this is the greatest chance you have of achieving inflation beating returns.

So remember, when it comes to retirement money, you can not, by definition, have an aggressive fund – at least 25% of the fund will be in cash, bonds and property at any stage.

*yes, I know that technically speaking there could be up to 90% in shares and property, but the reality is that this is usually not the case, with most “aggressive” funds having 75% or less in equities with the balance in bonds and cash.

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