FINANCE: Educating Employees Key to Successful Retirement
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There is much evidence to show that most South Africans are making the wrong retirement decisions. Yet the approach adopted by local funds is to assume that members are financially literate and able to make the right choices in respect of their investments or retirement savings. Unfortunately the reality in South Africa is that retirement fund members are more likely to be financially illiterate and unable to make the right choices.
“This is because there are insufficient support structures in place to help members make the right choice” says John Anderson, Alexander Forbes Financial Services (Pty) Limited. Instead of leaving the members of retirement funds to their own devices, more should be done to educate them so that more South Africans can maintain their standard of living in retirement.
Enabling more South Africans to achieve a reasonable net replacement ratio (NRR), that is, being able to continue their current standard of living in retirement, requires that either their fund, their umbrella fund management committee, or the key role players appointed by their governance structure, have the right experience and expertise. It is also important that fund managers or other key role players take the time to educate members, helping them to understand and manage the various processes and decisions required to achieve a reasonable NRR.
Outcomes-based retirement governance focuses on improving the results for members by assisting them in achieving an appropriate NRR – rather than the current approach which focuses narrowly on returns, or operational and compliance matters. In short, “if time and expertise are not available within organisations then certain functions should be outsourced with trustees maintaining oversight of the outsourced functions and their performance” explains Anderson.
Some key processes than can assist organisations facilitate outcomes-based governance include:
· Having a 3 year plan which focuses on all key strategic issues as well as ongoing operational matters. The plan should lay out the fund’s goals and plan ahead appropriately to ensure a long-term focus on achieving a reasonable NRR for members.
· Ensuring that trustee meetings are structured to facilitate discussions on the key factors impacting members’ NRRs, for example preservation, annuitisation, contribution adequacy etc. This can be built into the three year strategic plan and every trustee meeting can, for example, focus on one key issue impacting NRR. For example, “the March 2011 meeting could be dedicated to addressing preservation issues, the June 2011 meeting to annuitisation issues and so on” explains Anderson.
· Ensuring that trustees focus on the strategic operation of the fund. Trustee meetings should not be dominated by operational matters. Certainly, organisations “should avoid a situation where Trustees micro-manage the operational issues to such an extent that it becomes the focus of every trustee meeting” elaborates Anderson. Instead, a separate operational subcommittee could be established to deal with operational matters and report to the board at regular trustee meetings.
· Ensuring that appropriate information is included in agendas focusing on key strategic issues. Information should centre around the fund’s objectives, the key factors impacting those objectives and whether the fund is on track to deliver reasonable NRRs to members at retirement.
· Ensuring that roles and responsibilities are clarified for each of the issues impacting the achievement of NRR, including whether “the structure is relevant to the availability (time) and expertise of board, and that appropriate advice and functions are outsourced where appropriate” explains Anderson.
A key ingredient of a successful outcomes-based governance approach is whether the role of the employer is elevated. This will also ensure that financially illiterate members are not left to make uninformed decisions.
An employer should understand its role in ensuring that the key strategic issues impacting employees’ retirement outcomes are focused on and addressed. These include:
· Reviewing the appropriateness and competitiveness of contribution rates and benefits.
· Measuring the return on investment. This helps the employer remain competitive in terms of its benefit offering as well as ensuring that it optimises the full value of its employee benefit spend.
· Assisting with member communication and education. This is an area where the employer can make a significant difference, for example, by making it compulsory for employees to attend a retirement induction, fund update or other education initiatives.
· Ensuring appropriate and targeted communication when employees join or leave the fund.
· Ensuring that appropriate communication and assistance is provided to dependants on the death of an employee since often families look to employers for assistance.
· Placing editorials in staff communications or magazines promoting awareness and educating members on “planning for life” and attaining a reasonable NRR.
· Ensuring members are provided with appropriate advice, either by contracting with financial planners (and overseeing them) or providing members with access to financial planners meeting specified requirements.
“Employers should, as part of their governance processes, establish a permanent review mechanism to ensure that their employees’ retirement arrangements meet their personal objectives - while also remaining appropriate within the context of the total package of benefits provided by the employer” says Anderson.
Such a review mechanism should also focus on the link between the employer and the retirement fund and ensure that relevant issues are addressed.
Companies that get this right will ensure that “members, trustees and employers make decisions that help employees meet their retirement goals by focusing on outcomes-based fund governance” concludes Anderson.
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