THE assumption that pension funds should always invest their members’ savings into the capital markets for inflation-beating returns over the long term, needs to be revised.
Alexander Forbes’ Research Institute head Anne Cabot-Alletzhauser challenged current thinking in the retirement world industry at an event in Durban yesterday, and suggested that pension funds should also invest in care facilities for the elderly.
She said that traditionally, underpinning the assumption to invest in capital markets was a belief that when invested in companies listed on the Johannesburg Stock Exchange, the funds would used to generate growth and new jobs.
“Industries and markets have changed,” she said.
In fact, about 65% of the income in companies on the JSE came from other countries. And research showed the real employment creators are small and medium sized businesses.
She said the multiplier effect of retirement industry savings should ideally also include economic factors, such as reducing healthcare costs for its members and job creation.
She said when most people reach retirement age, they are relatively healthy and make d
ecisions as if they will generally remain healthy. “What we all forget is that unless we are run over by a bus suddenly, at some point someone will have to take care of us.”
In South Africa, “we still take care of each other” with 74% of the 4,4 million people above the age of 60 living in multi-generational homes.
But economic necessity was driving urban migration and family fragmentation, and increasing numbers of old people have no place to go.
“Life Esidimeni was a huge wake-up call for all of us. There are no long-term care facilities in this country,” said Cabot-Alletzhauser.
She said most people will enter retirement not being able to afford the care they will need later in life.
“So I have asked myself. Why not use retirement funds to fund long-term care solutions in communities?”
She said studies into this by actuaries at the Medical Research Board showed that in terms of reducing healthcare costs, raising employment among the youth and other factors, “the multiplier effect of this type of investment over three years is 1,5 times”.
She said jobs that involve “caring and connecting” cannot be replaced with a digital solution, and young people could find work in these long-term care facilities. “We need to change the mindset of investing with retirement industry savings,” she said.
An audience member inquired whether the industry shouldn’t rather be lobbying to be allowed to invest more of its members’ funds offshore, for a better and lower risk return.
She said people invest offshore to diversify their risk in the market, but in South Africa, the risk was economic. Investing in stocks did not create jobs and bricks and mortar investment in South Africa, she said.
Rob Rusconi, an independent actuary specialising in the financial services industry, said financial services firms and asset managers were driven by a short- term need to generate returns for pension funds, and were incentivised according to an ethos that was “whatever you do don’t fall behind, but also don’t do anything too radical to get too way out in front”.
Rusconi came up with an equally radical suggestion (for the retirement industry in any case) about creating savings that might provide some protection for middle income people later in life.
He said most employed people are middle class, and have low savings levels.
They are generally only one incident — be it the purchase of a too expensive vehicle, or a sudden and expensive medical procedure — from falling back into the lower income group, he said.
He said existing financial services products are complex, customers are unable to assess the value they are receiving, and the products generally do not meet the most basic assumption: Does it meet a need of a client?
As examples, he said disability funds generally cannot fund their members within 24 hours of ending up in a hospital, and it pays out a lump sum, instead of replacing the longer term income needs of the member. He said on Gap cover products “you have no idea when you are going to be paid” and that was after trying to understand hundreds of conditions of payment.
He suggested that employers deduct, at the beginning, just four percent of an employee’s retirement funds into a savings account, and that the employee be encouraged to save for most of their career, possibly until 49, when their needs to save for retirement became more important.