deon viljoen - alexander forbes...jul 21, 2016 · deon viljoen group chief executive (interim)...

2016/07/21

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BUILDING A BREAKTHROUGH BENEFITS MODEL

Hot Topics Summit 2016

Deon Viljoen

Group Chief Executive (Interim)

2016/07/21

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2013

2014

2015

2016

alexanderforbes.co.za/research/benefits-barometer

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https://www.alexanderforbes.co.za/research/benefits-barometer



2016/07/21

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Anne Cabot- Alletzhauser

Head: Research

Institute

Dr David Knox

Senior Partner at

Mercer

2016/07/21

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Ayabonga Cawe

Founder & chairman of

Rethink Africa NPC

Megan Butler

Senior Actuary

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Let’s look at the facts

If choice = reduce pensionable pay & contributions

Less than 5% of members > 75% replacement ratio

Reform process has been halted

Less than 10% preserve when changing jobs

People don’t see retirement as their priority – mortality reality

Trust is low: in financial services; in government

IN SPITE OF YEARS OF PROMOTING A SINGULAR FOCUS

ON RETIREMENT SAVINGS WE ARE NOT WINNING THE

HEARTS AND MINDS OF MEMBERS

Private-public partnership

Private sector

retirement schemes

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Fragmentation is the root of the failure to deliver

What it takes to get it right

What people need

How the focus has evolved

From employer to trustees From employer to umbrella fund

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The research journey

2013 2014 2015

Assessment of the effectiveness of the EB system

How to get employers and employees to re-engage

Need to address the whole financial journey for individuals

What’s require to shift the focus to financial well-being

These critical insights led us to the following questions?

Is it us, or them?

We know that employee benefits provide effective conduit for

personal savings & family protections, but do the employers &

their members?

Problem seems to rest with a singular focus on retirement

savings as the central theme for long term savings

We believe it’s the whole financial journey that matters

Securing financial wellbeing is the goal – but how?

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The Singapore Central Provident Fund

Government fund 1965 –

Policy decision not be a

welfare state

Asset-based development

strategy – key to self-

determination & financial

capability

Minimum for annuitisation

Employee decides on

priorities

Does it only have to be about retirement?

Employer

contribution

20%

Employee

contribution

20%

Central

Provident

Fund 40%

Ordinary 30%

Medisave 4%

Special 6%

Housing

Education

Approved

investments

Retirement

savings & top ups

Hospital costs

Old age

Contingencies


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Highest savings rate in the world at 24%

Consumer delinquency rate of 5.97%

Ranks highest in financial literacy

Compulsory savings

Employer & employee contribute 20% - total 40%

Family considerations

Lifecycle for savings

Could a similar model work for SA?

Probably not as a

government

initiative

‘Plug & play’ option

Would employees

want it?

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What is it that South Africans require most?

SA has a different demographic pyramid from the US, Europe & northern Asia

SA’s problem isn’t retirement – it’s about social mobility for its’ youth

WHAT DO OUR MEMBERS WANT?

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Needed to understand:

1. How people view their benefits

2. Needs & how benefits respond

3. What changes are needed to the

benefits framework

Poor engagement with long-term savings

WHY?

What questions did we pose?

1

2

3

What do people really want, and what can the financial services

industry and other role players do to assist individuals and

households along their financial journeys?

Is it really meaningful for the average South African to focus so

doggedly on retirement savings, when there has been so little

focus on an individual’s overall financial journey? Could there be

other ways to rethink this?

What might people be prepared to save for over the long term, and

what would incentivise them to do so? What other key aspects

beyond monthly income could employee benefits fund?

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Methods used to answer our research questions

1. Hypothesis

development

2. Online survey

3. Interviews

4. Focus groups

But there were some limitations & biases

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Research question 1

About 80%

ranked long-

term

savings as

being very

important

Research question 1

Financial

services

ranked 1st ,

followed by the

individuals

themselves

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Focus group insights

Role of

employer

provided

benefits

Research question & 2 3

Cover family funeral costs

Get a lump sum at

retirement

Get access to emergency

funds

Buy or build a house

Pay for education

Pay for medical expenses

Protect family from loss

of income

Get a monthly income in

retirement

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Research question & 2 3

No restriction, but no tax or

matching benefit

Matching contributions from

my employer or government

A tax break

Focus group & interview insights

The role of informal

institutions as key

access points for

financial services

The importance of

income in the

absence of ‘assets’

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Focus group & interview insights

incentives

reform biases

perceptions

mistrust

innovation

Insights from ‘vox pox’ exercise

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Where to from here?

Health

Education

Housing

Emergency

funding

Retirement

savings

Income

protections

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Where to from here?

Coordinating

interventions

Moving beyond

replacement ratios

Holistic models &

approaches

Role for employers

PENSION SAVINGS AROUND THE WORLD

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MERCER 45 21 July 2016

Agenda

• The World Bank multi pillar approach

• Melbourne Mercer Global Pension Index

• Different systems around the world

• Some principles for an Ideal Retirement System

• Some concluding remarks

MERCER

What is the ideal retirement system?

WORLD BANK | MULTI-PILLAR APPROACH

Basic public

pension

Public mandatory contributory system linked to earnings

Private, mandatory

, fully-funded system

Voluntary fully-

funded system

Support for the elderly outside

pensions

0 1 2 3 4

Poverty alleviation

Often pay- As-you-go

Often DC based

Many forms

Formal & informal

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MERCER

What is the ideal retirement system?

WORLD BANK | MULTI-PILLAR APPROACH

Basic public

pension

Public mandatory contributory system linked to earnings

Private, mandatory

, fully-funded system

Voluntary fully-

funded system

Support for the elderly outside

pensions

0 1 2 3 4

Yes No No Yes In part

South

A

fric

a

MERCER

Melbourne Mercer Global Pension Indexs.

ADEQUACY

SUSTAINABILITY

INTEGRITY

“What do you get?”

“Can it keep delivering?”

“Can it be trusted?”

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MERCER

Calculating the Melbourne Mercer Global Pension

MERCER

0.0 20.0 40.0 60.0 80.0 100.0

IND

KOR

JPN

CHN

IDN

ITA

MEX

AUT

BRA

ZAF

POL

USA

FRA

DEU

IRL

SGP

GBR

CHL

CAN

FIN

CHE

SWE

AUS

NLD

DNK

Index value

B Grade

C Grade

D Grade

B+

A Grade

C+ C+

Overall 2015 results

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MERCER

The different systems around the world

1. Predominantly Social Security (pillars 0 & 1)

51 21 July 2016

Country Net

replacement

rate (average)

Pension assets

(% of GDP)

Austria 91.6 6.0

Italy 79.7 7.6

South Africa 11.8 82.5

MERCER



2. Compulsory and funded savings (pillar 2)

Who is covered?

52 21 July 2016

Country Coverage

(% of working age)

Pension

assets

(% of GDP)

Denmark 83.7% 168.9%

Netherlands 88.0% 160.6%

Australia 68.5% 108.2%

Singapore 64.0% 71.2%

South Africa 23.4% 82.5%

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MERCER




3. Auto enrolment (with opt out) arrangement

53 21 July 2016

Country Contributions Opt Out Schemes

United Kingdom 2% rising to 8%

employer &

employee

Available NEST plus

New Zealand 3% from employer Available Automatic

MERCER




3. Auto enrolment (with opt out) arrangements

4. Voluntary arrangements (often with employer) (pillar 3)

54 21 July 2016

Country Coverage

(% of working age)

Pension

assets

(% of GDP)

Canada 49.8% 98.9%

USA 47.1% 117.6%

Japan 32.9% 48.2%

Ireland 29.3% 64.4%

South Africa 23.4% 82.5%

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MERCER




3. Auto enrolment (with opt out) arrangements

4. Voluntary arrangements (often with employer) (pillar 3)

5. Non-pension savings (pillar 4)

Family reliance

Informal sector

55 21 July 2016

MERCER

What are the objectives of a savings system?

• Retirement

• Emergency needs

• Housing

• Health

• Education

through formal or informal arrangements?

56 21 July 2016

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MERCER

Two examples of a compulsory savings system

Item Malaysia (EPF) Singapore (CPF)

Contribution rates Employer: 11%

Employee: 12%-13%

Employer: 20%

Employee: 17%

Use of savings Retirement: 70% of

conts

Other: 30% of conts

Ordinary: 21%-23%

Medisave: 8%-9%

Special: 6%-7%

Permitted uses of Other Housing

Education

Medical

Age 50

Ordinary – housing

Medisave- medical

Special - retirement

Benefit format Lump sum

Monthly drawdowns

Combined accounts

CPF Life

Investment choice Limited

20% > basic level

Ord acc. with some

limits

57 21 July 2016

MERCER

Principles for an Ideal Retirement System

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MERCER


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MERCER


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MERCER


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MERCER


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MERCER

Some concluding remarks

• Private saving for retirement is a necessity, but …

• Many individuals want to save for other purposes, therefore …

• The community needs to accept the long term direction, and …

• Employers have an important role to play, together with …

• The gradual introduction in to any new arrangement, that …

• Covers as many of the working age population as possible.

63 21 July 2016

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PANEL

Time for a break

SEE YOU AFTER

THE BREAK

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Michael Prinsloo

Executive Head:

Institutional Research

& Product

Development

Lettah Mpanza

Product Development

Leader

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Matthew Nell

Founding member of

Shisaka & director of

the South African

Housing Club

HOW RESILIENT ARE SOUTH AFRICANS TO FINANCIAL CRISIS?

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What do South African’s require most?

Need to expand the ambit

of savings

Social mobility for the

youth

Private sector

How do we help individuals

manage the tight rope?

Role of the employer as

part of the building blocks

Ability to cope with unforeseen expenditure

Source: Old Mutual Savings and Investment Monitor, July 2015

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Ability to cope with unforeseen expenditure

Source: Old Mutual Savings and Investment Monitor, July 2015

How South Africans save

Source: FinScope South Africa Consumer Survey

People do save: 36% use both formal & informal savings products

52% use informal savings products

So what’s compelling about the informal sector?

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How South Africans save

The challenge:

no aggregate

view of savings

Searching for the answer

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Emergency savings help weather the storm

How do we make

emergencies less of a

surprise?

How do we introduce a

framework that

incorporates long-term &

short-term savings goals?

What role can the employer

play in creating an enabling

environment?

Better outcomes

Options

Rewarding

prudent

savings

behaviour

Help employees to help themselves - workplace stokvel

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What would it take?

Pre commitment by the employees & employers

Payroll set up

Ongoing sight of aggregated short-term & long-term saving picture

Ease of access to funds in case of an emergency

Access to financial planning & guidance

Replenishment of saving pot as- and-when required

If we could save for one thing that would transform South Africans

Education

The foundation

for social

mobility

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Your biggest bang for buck

Start investing in the early years of education as this would provide the

greatest payoff

Educational inequalities start as early as primary school

2/3rds of children cited lack of fund as the main reason for not attending

school

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What would it take?

Pre commitment

Determine level of education and funding requirements in how many

years and over what period

Set contribution rate (Employer matching program?)

At end of saving period, contributions reallocated to retirement

savings

The key is to maintain a constant savings rate that allocates to

different priorities over time.

HOUSING AS A STEPPING STONE TO FINANCIAL WELL-BEING

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Why investment in housing is important

A savings priority

Biggest default savings

interventions

Substantial retirement

asset

Contributes to financial

wellness

How can retirement funds be leveraged

to improve housing investment by

employees as an important part of the

retirement package?

How employees earning R7 000 to R25 000 live

46%

38%

6%

5%

4%

own formal houses

rent formal accommodation

have shacks in an informal settlement

have formal or informal dwellings in backyards

have traditional dwellings often on tribal land

Source: Census 2011

Overall there is sever overcrowding

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Housing Market segments

Subsidy Market Gap Market Affordable

Market

Normal Market

Income <R3.5k

Price <R180k

Income R3.5k – R12.5k

Price R180k – R370k

Income R12.5k – R17.5k

Price R370k – R500k

Income >R17.5k

Price >R500k

Formal housing delivery

Incremental housing delivery

Subsidy housing

delivery

How is housing financed?

Housing delivery

Housing subsidies

Private housing

finance

Subsidy housing delivery

Government housing &

basic services subsidy

(40m² give away house)

Personal savings

Unsecured micro loans

Incremental

housing delivery

No government subsidy

Personal savings

Unsecured loans

Pension backed loans

Formal

housing delivery

FLISP sliding scale subsidy

for incomes of up to R15k

pm linked to mortgage loan

Personal savings

Mortgage backed loans

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Key constraints

The success rate of securing

a home loan for households

earning between R3.5k – R16k

is about 1 in every 32

households

Poor creditworthiness – Over-

indebtedness & tainted records

Inadequate access to housing

stock

Difficulty in accessing mortgage

loans

Lack of knowledge & experience in

housing market

How is housing accessed?

Ability depends on affordability, creditworthiness & accessibility to housing

opportunities

Housing investment is an integral part of socio-economic development &

survival strategy - don’t invest in 1 place

Most practical way of becoming acquiring a reasonable quality house is to:

Access land & build in stages

Upgrade & extend house already acquired (often from government)

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Employer supported investment in housing

Success of a

business is linked

to the performance,

commitment &

well-being of its

employees

Finding a balance

Accommodation is a personal decision

Extent of employer support varies

Aim should be to support effective housing investment

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Different types of housing support

Information, advice &

transactional support

Access to housing loans

through scheme

arrangements

Building & providing

accommodation

Housing allowance

Housing grant or subsidy

linked to housing

transaction

Structuring employee housing support

Housing support should: Personal circumstances

Increase leverage in

housing market

Proactive & accountable

housing decisions

Financially sustainable

Support should include: Advice

Creditworthiness &

affordability

Housing transaction

Ongoing Home ownership

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Pension-backed housing loans are key

Access to home loans

where mortgage loans

are not available

Supports owner building

of new houses

Supports upgrading &

extensions of existing

houses

Legislative framework

Enabled through the Pension Funds Act

Key elements:

Apply for loan through administrator

Normal credit criteria apply

Portion of retirement savings is pledged as security

Deduct loan instalments directly from payroll

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Risks & mitigating factors

Fund credit values could

be reduced

Death & disability

Resignation or

retrenchment

Leakage – loans not

used for housing

Divorce

Home ownership is dependent on & contributes to financial well-being

Employees earning less than R25 000 need housing support

Empowered home owners make more effective housing investments

Pension-backed housing loans are a critical enabler

Concluding thoughts

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PANEL

So what did the modelling reveal?

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The priorities

Retirement funding

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Dealing with emergencies

% of pay

Retirement 12.5%

Emergencies 10.0%

Target

number of

salaries = 6

months

Housing

% of pay

Retirement 12.5%

Emergencies 10.0%

House 45.0%

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Education

% of pay

Retirement 12.5%

Emergencies 10.0%

House 45.0%

Education 20.0%

Medical health during retirement

% of pay

Retirement 12.5%

Emergencies 10.0%

House 45.0%

Education 20.0%

Healthcare 3.1%

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Risk benefits

Benefit dependent

Assumed 3%: basic

death, disability &

funeral cover

% of pay

Retirement 12.5%

Emergencies 10.0%

House 45.0%

Education 20.0%

Healthcare 3.1%

Risk benefits 3.0%

Total picture is scary

% of pay

Retirement 12.5%

Emergencies 10.0%

House 45.0%

Education 20.0%

Healthcare 3.1%

Risk benefits 3.0%

Total 86.6%

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Clearly there is a problem

Funding all priorities in full, at one time, is not typically possible for most

Lifecycle theory provides some hope – sequencing helps manage the cost

But it requires individuals to stay the course

Which is difficult if the system does not meet immediate needs as well as

long term needs – so individuals cash out!

So who will help individuals stay on track?

Xxx

An integrated lifecycle savings programme significantly improves the

probability of meeting lifetime goals

A NEW APPROACH TO

SOLVING FOR SAVINGS

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Can we have it all?

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What did we learn

46.2% lifetime contribution to

approximately meet all objectives

Levers to lower the overall contribution

Power of time

Subsidisation

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46% reduces to 36% starting 2 years earlier

Subsidisation

Removing education (subsidised at lower levels), the required

contribution drops to 20%

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The effect

Assuming a 30% total contribution is acceptable, subsidisation of

education ranges from 60% to 9% & lower as salaries rise

The new benefits model should…

provide a meaningful array of key financial & social protections

provide individuals with at least core benefits

be flexible enough to prioritise certain savings contingencies above others &

switch priorities through time

provide guidance & appeal to all employees

be simple to understand, cost-effective & doable

limit the administrative burden on the employer & employee

leverage economies of scale to provide cost advantages

be mandatory, or a condition of employment

The employer’s EB programme provides a guided architecture for an

individual that allows them to address a lifetime of financial needs.

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PANEL

It would require 4 broad pillars

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But, aren’t we undoing our good work?

At the heart of it all this is a trade-off

problem

Is it better to get 5% of people

past 75%, or 50% of people to

50%?

Are there challenges with this benefits model?

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We believe this…

is better than the current set up, &

doesn’t rely on government

would engage more people

would strengthen the EB offering

hugely with associated benefits to

employers

would go some way to

addressing the more immediate

needs of the people – one of the

impediments to reforms aimed at

longer term savings

Closing comments

THANK

YOU

deon viljoen - alexander forbes...jul 21, 2016 · deon viljoen group chief executive (interim)...

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