The retirement saving gap in South Africa is well documented – and alarming: the vast majority of people do not save nearly enough to afford retirement. Because retirement needs are not tangible in the present, they are particularly susceptible to being ignored.
In addition, focus is often placed on administration fees, investment management fees and past performance as reasons for people retiring with insufficient savings. However, says Guy Chennells, Head of Research and Development for Discovery Employee Benefits, three factors have proved to have greater consequence: inadequate contribution levels, insufficient savings terms and increasing longevity.
“We’ve done the research, and the findings are clear: while costs are of course a sensible consideration when choosing a retirement fund provider, once fees are in a reasonable band, they have a limited impact on ultimately retiring well.”
“In South Africa, the biggest problems are low contributions and preservation rates,” he explains. “The amount employees contribute and the length of time for which they save without withdrawing are the most significant drivers of ultimate savings success. In other words, what really makes or breaks retirement outcomes are people’s financial behaviours and the qualitative effects of their lifestyle choices.”
The good news for South Africans is that these factors are, in varying degrees, within the control of each employee. And if it comes down to an individual’s choices, says Chennells, there’s hope. “A powerful behavioural insight reveals that by rewarding positive savings behaviour, people can change – and Discovery’s digitally-led shared value approach to retirement enables precisely this.”
The power of shared value in investment and saving decisions has been well and truly proven by Discovery Invest over the last 10 years. By encouraging clients to invest earlier, maintain their investments to term, draw down income more slowly, and become healthier through financial incentives, clients have more money invested for longer. This also means Discovery earns fees for longer. These excess fees are then used to fund the financial rewards for the changed behaviours that produce them.
The results have been profound – Discovery Invest has seen savings terms increase by three years on average, and additional investments increase by 173%, with enormous implications for the retirement outcomes of those investors.
Discovery Employee Benefits’ new retirement fund is designed to harness this shared value power.
Through digitally enabled behavioural tools, it can also show people the future outcomes of their financial decisions, while empowering them to make better decisions in the present. Some of the ways digital design supports behaviour change are by:
- Projecting expected income in retirement in real rand value terms: By stripping out the impact of inflation, and showing this projection in terms of income rather than assets, the numbers are immediately and intuitively understood by an average member and so this overcomes much of the information gap that leads to poor decisions.
- Showing immediate effects of negative decisions: With their projected income visible online and split between what they have already saved and what they plan to save, members can immediately see what projected income they will have if they withdraw their savings. This combats overconfidence where people overestimate their ability to make up for a bad decision later.
- Providing actionable decisions such as a future contribution increase plan that immediately closes their projected retirement income gap, ensures that we capture people’s good intentions, as they are the strongest, and then lock in a plan that benefits from inertia (the tendency people have to not change things).
- Making it easily accessible in a member’s pocket through mobile-first web combats procrastination, a strong behavioural bias.
“For businesses that truly want to help employees close their retirement gap, there is finally a solution – a world-first one that is structured through behavioural economics,” says Kenny Rabson, CEO of Discovery Invest and Employee Benefits. “Discovery’s new Retirement Fund uses known behavioural techniques in a ground-breaking way, making it much easier for employees to engage with their finances and take ownership of their choices.”
“As key players in helping employees to make life-altering financial decisions, it is the duty of both employers and insurers to empower people in ways that make the biggest positive impact: incentivising wise decisions and rewarding sound financial behaviours. Employee benefits have been done before, but never like this.”
Find more information on Discovery Employee Benefits here.
Discovery Limited is a South African-founded financial services organisation that operates in the healthcare, life assurance, short-term insurance, savings and investment and wellness markets. Since inception, Discovery has been guided by a clear core purpose – to make people healthier and to enhance and protect their lives. This has manifested in its globally recognised Vitality Shared-Value insurance model, exported to over 19 countries and reaching over 11 million members. Discovery trades on the Johannesburg Securities Exchange, with a market cap of $7 billion.
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