There are four important reasons for the existence of retirement funds.
In the 21st century retirement funds exist to:
- Assist individuals to save for a longer retirement as people increasingly live longer.
- Provide better returns on savings as a result of professional and regulated investment approach to such savings.
- Reduce the burden of care for the retired on the government and taxpayers.
- Ensure that our collective savings, and the influence it brings, contributes to a prosperous and more equal society in balance with our natural environment.
Why retirement funds exist today is a more complex question than was the case a hundred years ago.
That said, there are four important reasons for the existence of retirement funds:
- To help us save for retirement as we increasingly live longer
In its modern form, a retirement fund exists so that an individual can save in a structured and regulated way for the duration of their working life. The aim of such savings is to leave them with the financial means to continue their life after retirement. To this end, retirement funds enable the collection, investment and disbursement of savings of people over the course of their economic lives.• Collection: The orderly collection of an individual’s earnings typically occurs by way of deduction from salaries or wages when earned. In many cases retirement funds also collect contributions from employers that wish to partially match their employees’ contributions.• Investment: Retirement funds place the pool of collected earnings with professional investors (financial intermediaries) under a specific mandate. The mandate guides the professional investor to pursue expected returns, mitigate investment risks and invest into a portfolio of preferred asset classes and geographic exposure.
• Disbursement: When retirement fund members retire, the fund returns their savings, usually as a combination of a lump sum on retirement and an annuity thereafter. The amount each member will receive is dependent on the member’s contributions and investment performance, and is either structured as a defined benefit or defined contribution fund.
What experts say: “Local pension funds collectively manage over R6.2 trILLION in assets and the discussion on their effect on society and the role retirement assets should play in socio-economic development should be accelerated.”
Elias Masilela – Chairman, Impact Investing South Africa, April 2019
2. To provide better returns on savings as a result of professional and regulated investment of such savings According to the Association for Savings and Investments (ASISA), R6.2 trillion in collective savings is managed by the financial sector in South Africa. These savings belong to workers and savers and are deployed productively in the South African economy to create jobs and wealth for savers. Although the investment of savings by professional asset managers is a mechanism for securing investment returns and managing investment risk, recent history has shown that even when regulated, asset managers and the companies in which they invest can destroy value for savers. This can be either through underperformance of managers or unethical/unscrupulous investment/corporate practices as seen in the global financial crisis of 2007 and, more recently, Steinhoff. The placement of collective investments with a small pool of asset managers also carries the risk of disempowering savers, with very little access or control over their savings. It therefore becomes very important that both members and trustees carefully select and hold financial intermediaries, such as asset managers and consultants, to account.
3. To reduce the burden of care on government and society
Before the emergence of European market societies where workers earned cash incomes, care for the retired was undertaken by families and landowners. As cash economies arose, the pooling of savings become a mechanism to create safety nets for workers and their families. The oldest retirement funds in the world were set up by public organisations, such as churches, to care for their elderly ministers.
In modern days retirement funds are set up by both public and private organisations. Whereas they are often set up so that these organisations don’t have to bear the full burden of care for their workers after retirement, they also ensure that these organisations attract and retain workers.
In the absence of citizens saving enough for retirement, the responsibility falls on governments to care for retired citizens. In turn, current income earners’ taxes would be required to finance the retired. Retirement funds therefore provide a mechanism for governments to proactively manage the future cost of care for their retired citizens. To this effect countries with established retirement funds tend to both regulate and incentivise retirement fund savings.
4. To ensure that our collective savings, and the influence it brings, contribute to a prosperous and more equal society in balance with our natural environment Responsible investment is a movement aimed at ensuring environmental, social and governance (ESG) issues are considered when directing global financial capital. It is championed by the United Nations Principles for Responsible Investment (UN-PRI). Retirement funds across the globe, as the ultimate asset owners, are seen to be pivotal in providing asset managers with a mandate to invest responsibly. In an era where economic and social activity is placing immense pressure on natural resources, retirement funds can also serve as custodians and agents for a more sustainable and just future.
CONSIDERATIONS FOR TRUSTEES, PRINCIPAL OFFICERS AND FUND MEMBERS:
- In South Africa, people are not saving enough to maintain their retirement income to a level even close to their equivalent monthly salary post-retirement. Members should realise that the longer they live, the more money they will need for retirement.
- It is best to start saving early. Retirement funds offer a tax-effective and regulated way of saving. Retirement savings also allow people that start saving early enough to get the benefits of compounded returns on their investments.
- Collectively retirement funds are large asset owners, and potentially influential investors in companies, and the broader South African economy. Trustees and members should learn how to use this power responsibly.
- Trustees of retirement funds should be held accountable to select high-performing, ethically run asset managers and consultants.
- A strong case is made that the fiduciary duty of trustees in the 21st century includes considering environmental, social and governance (ESG) issues when making investment decisions.
- finweek: ‘Your Guide to Saving for Retirement’, 2017
- Daily Maverick: ‘Impact Investing could bridge the socialist/ capitalist divide’
- Understanding South African Financial Markets (5th Edition), ‘Retirement Funds’, Chapter 7
- ASISA Overview, April 2019, Pg.3, www.asisa.org.za