On the back of the widely known statistic that over 90% of South Africans are not in a position to retire comfortably, FNB Employee Benefits has also noted a growing trend amongst SME employees not fully understanding or saving enough for retirement.
“Although up to 70% of our commercial banking employers currently don’t offer formal benefits to their staff members, the small and medium businesses that do offer these benefits are concerned at the low rate of retirement saving from their staff,” says Elize Giese, FNB Employee Benefits CEO.
“Poor savings and over-indebtedness often result in several work-related challenges including poor performance and job hopping. On the positive side, employees who better manage their personal finances tend to be more satisfied, motivated, and productive.
“As part of broader initiatives to improve South Africans’ savings habits, SMEs too have an important role to play: Employers should consider investing in improving money management amongst their employees as part of their employee benefits offering.”
Giese as she unpacks some of the reasons for employees’ lack of savings for retirement:
- Preservation when changing jobs – if people change jobs and have existing retirement savings from the previous employer, employees are urged to preserve their retirement savings. Sadly, in South Africa it is popular to cash in retirement savings when changing jobs and this is one of the reasons so few people can afford to retire. This has a double impact – you spend the money that is meant for retirement and more importantly, you lose out on the growth and compounding of the money over time. This has a much bigger impact than most people realise.
Consider this example: you pay R1 000 per month into your fund and earn a net 4% real return (after costs and inflation). Over forty years this investment would grow to R1.14m.
But after ten years you change jobs and decide to upgrade your car with your savings, and to start saving afresh. At that point your investment is worth R144 000.
As a consequence of this decision, at retirement you will only have saved R673 000. This is 41% less than before. That means a 41% lower pension! That car upgrade actually cost you R467 000, and possibly a comfortable retirement.
- It’s impossible/too late to secure a financially comfortable retirement – answer is simple, the sooner the better, even contributing a small amount to retirement savings now can be very beneficial in the long run.
- Lack of understanding of benefits -financial literacy among the general public continues to be low, and monetary worries remain a common source of stress, absenteeism, and poor performance at work. Employers need –now more than ever– to focus on improving the financial education of their employees. They must help staff gain the confidence to improve their financial wellbeing, and the confidence to face changes, both in their personal circumstances and the wider economy, without losing their focus at work.
Lastly, there’s a common misconception amongst employees that all savings are the same. One of the key reasons for this is the fact that educational material shared by SMEs does not adequately highlight the importance of understanding that not all savings are created the same.
“By lumping retirement savings, fixed-term and call accounts, day-to-day savings vehicles, emergency savings, tax-free savings and even many forms of investment together under the banner of ‘savings’, a misperception has been created that all these savings vehicles are the same.
“The result is that many employees don’t realise that each type of savings account has a very unique purpose and requires a different mindset in order to deliver on that purpose,” concludes Giese.