With disposable salaries showing the first double digit increase in 15 months, according to the latest disposable salary index by BankservAfrica, it is imperative that local employers assist their employees to use some of the increase in salaries as an opportunity to grow their contributions to their retirement savings, rather than upgrading their lifestyles.
This is according to Steven Nathan, Chief Executive Officer at 10X Investments, who says good employers care about their employees’ financial well-being and should encourage retirement savings. “Many employers don’t even offer their employees a pension fund, which is not only cheaper than if employees saved on their own, but also motivates employees to start saving towards their retirement (which many would probably not do otherwise).”
Latest data from Statistics South Africa’s Labour Force Survey (Second Quarter 2013) reveal that of 11 699 employed individuals surveyed, only 50% receive pension or retirement fund contributions from their employers. Employers should be doing more to help their employees secure a comfortable retirement says Nathan. “Unfortunately, following the virtual abolishment of defined benefit retirement plans, many employers have abandoned sponsoring a retirement fund to the detriment of their employees. This could be achieved through a pension or provident fund or even though a group Retirement Annuity arrangement.”
Company sponsored retirement funds save employees from costly fees as employees pay wholesale retirement fund fees, compared to retail fees on their own, says Nathan. “Fees are critical to anyone’s long-term investment return because for every 1% saved in fees the final pension value increases by approximately 30% over a working life.”
Nathan says employers should advise employees to use a portion of their salary increase to boost their retirement savings contribution rate. “The average contribution to retirement funding is typically 10% of one’s salary. However, 10X recommends a rate of 15%. Employers should encourage their employees to increase the contribution rate between 1% and 2% on an annual basis, typically at salary review time.”
He says most people put off saving for retirement as it seems to be too big a step to make now, but would start saving in six months if given the opportunity. “Employers can use this behaviour bias by asking employees to start their retirement savings program in six months. Employees could then use a portion of their increased salary to fund their retirement.
“Offering a company sponsored retirement fund also assists to attract and retain quality employees by improving employee morale and loyalty, as it provides a convenient way for them to invest for their retirement. Employers have a critical role to play in improving the savings culture in South Africa and should start assisting their employees to retire comfortably,” concludes Nathan.