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Consider this: during the 40-some-odd years that an individual is employed, most of their interactions with their benefits simply follow a format that has been conceptualised by another party (the boards of trustees or the employer).
This must in turn solve for a broadly generalised employee needs that may or may not represent the individual’s own needs.
As default options become more widely employed, decisions around employee benefits are tending to fall into the “set and forget” mode of financial engagement.
It’s not surprising then that employees are neither invested emotionally in the process nor any more financially savvy because of it.
But what if we completely reframed the question – and in so doing, reframed the potential answers?
What if we said to employees: “We want you to engage in a long-term savings programme. It’s good for you, your families and the economy.
But let’s widen up the opportunity set for you as to how you could use these savings for things that are more relevant to your life at each step in your financial cycle.”
We believe individuals would start paying more attention then. More importantly, by shifting our focus to developing higher levels of fiscal responsibility and financial knowledge, this would surely have the knock-on effect of alleviating a dependency on government?
In grappling with these questions, we found one other country that has successfully tackled exactly these issues.
Singapore: A case in point
Singaporeans may seem worlds apart from South Africans and the types of trials that have affected us over the last few generations, but there’s one aspect in Singapore’s economic success story that is worth noting.
Just before Singapore achieved self-government in 1959, the country looked set to introduce a social insurance or public assistance plan similar to a number of other post-colonial government-funded social security systems.
But wiser minds prevailed, and the view emerged that these limited government resources could be better applied elsewhere.
Retirement savings were simply not the highest priority for an emerging economy fiscus, the Singaporean ministry of finance observed in 1964.
Singapore made the conscious decision that it was not in their interests to become a welfare state. As such, the central tenet of their compulsory savings vehicle, the Central Provident Fund (CPF), was that “the individual was responsible for determining how best to secure the future of their financial well-being”.
That meant that, although both saving and preservation in the fund was compulsory for citizens of Singapore until the age of 55, there was still an extraordinary amount of latitude given to individuals on how best to apply those funds to secure their financial protections.
In the CPF individuals can determine whether to use their savings to fund their housing, their (or their children’s) further education, their health (with options for basic medical coverage, additional hospital coverage for emergencies and post-retirement frailcare demands), their investments, their income protections, a top-up of other family members’ retirement or medical coverage, or ultimately, longevity insurance.
What was particularly bold about the Singapore model is that while it acknowledged that saving for retirement was indeed important, it was not seen as the only important priority for a developing economy or the citizens of that economy who were still battling to acquire the basic necessities to maintain a viable financial existence.
At first glance, any compulsory savings model that demands 40% of one’s income would seem untenable. But consider exactly how much an individual already allocates to housing, education, medical aid, retirement and risk protection and that allocation is well in excess of 40%.
The Singapore model simply argues that by managing these savings requirements collectively and cost efficiently, one has a far higher probability of being able to cover those collective demands.
Today Singapore has one of the highest savings rates in the world (24%), ranking just behind China and India; it has a credit default rate that has remained constant between 0.12% and 0.15% for some time; and it ranks number one in the State Street Center for Applied Research 2014 Study on Financial Literacy.
Perhaps the greatest innovation of the CPF is the recognition that for individuals to really engage with a long-term savings plan, they need to be able to leverage their account resources at strategic points along their financial life cycle.
These funds could ultimately be used for a select range of asset-building and capital development purposes in the course of an individual’s financial life cycle – while at the same time ensuring that there are minimum reserves to fund post-retirement income and medical aid needs.
Would a Singapore-like model work for South Africa?
Should the system necessarily be a role model for SA? Probably not, given its current form. To begin with, this is a 100% government administered initiative.
At this point in SA’s evolution there are too many other priorities on government’s plate to undertake a project this ambitious.
But there is nothing to stop the private sector and employers in particular from providing their employees with something that closely approximates this “guided architecture” for financial planning for their employees.
The reality of SA is that we do not have an old-age problem. Our demographic profile is distinctly different to the Western and even Asian economies.
SA has a youth problem. And unless we can find a way to redeploy savings of families to tackle the challenge of social mobility, forcing people to place a primary focus on saving for retirement will be a futile exercise.
But, if we could all agree that it is the spirit of what this model is trying to address that is powerful and not get caught up on trying to emulate the details of their programme, then we believe there’s much of the essence of their model that we could begin to capture through our private occupational funds.
Currently South Africans are retiring with 32% replacement ratios. This is a function of the fact that as employees move from one company to the next, only 8% appear to preserve even a portion of their previous savings, according to the 2015 Alexander Forbes Member Watch Survey.
Until we sort out the issues around what needs to be mandatory in our long-term savings programme, this will continue to be the norm.
We can engage with this reality in the following ways:
- We can challenge whether securing a 75% replacement ratio really is the most critical target when there are any number of ways that individuals can secure a stable retirement environment above and beyond that ?explicit income.
- We can extend an individual’s commitment to their long-term savings programme by enabling them to save for other imperatives in addition to retirement income.
- Provision could be made into an emergency savings vehicle that allows them to dip into reserves before being forced to cash in their funds.
- What our members really need are products and solutions that actually teach them how to get from point A to point B in their financial journeys. It’s not enough, for example, to offer people options such as pension-backed housing loans.
The real challenge for first-time asset owners is not so much the funding as it is learning how to manage the ongoing financial responsibility of owning an asset.
Bottom line: An effectively structured benefits programme could prove to be a powerful framework for creating a targeted financial planning tool that serves the interests of all South African employees.
How far could we possibly push our current employee benefits framework and how close could we come to capturing some of the Singapore success story? We think further than you might first imagine.
Anne Cabot-Alletzhauser is head of the Alexander Forbes Research Institute.
This article originally appeared in Collective Insight, which was published in the 13 July edition of finweek. Buy and download the magazine here. To download the entire Collective Insight supplement, click here.
