Many employers set up retirement fund benefits to ensure that their employees can work towards being financially secure when they reach retirement and no longer receive an income from active employment. Employer-linked retirement benefits also produce secondary “reciprocal” benefits for the employer, including attraction and retention of suitable talent. But this isn’t where an employer’s role ends. Everjoy Gumbo explains why employers have a fuller role to play.
Beyond simply offering retirement benefits, as an employer, you can help your employees maximise their investment by encouraging them to actively engage with their accounts from time to time as a way of checking their progress. Allan Gray research indicates that many members neglect to engage at all.
Our research reveals low engagement
We analysed the behaviour of members of the Allan Gray Umbrella Retirement Fund who were six months away from reaching retirement over the course of the last year. While 58% of them opened the emails notifying them of their upcoming retirement date, only 22% of these members actively engaged with the retirement outlook tool included in that email, which aims to help them understand where they are in their journey.
We also analysed the data of just over 300 members who were two years away from their stipulated retirement age. Of these members, 65% have active online accounts, but only half of them have accessed their online accounts year to date. This highlights that many members may likely only know how much they are contributing monthly towards their retirement investment, but are in the dark about the rest of the detail – and are therefore not able to assess whether or not they have accumulated adequate funds to provide them with a retirement income that can sustain their lifestyle.
Do you know how your employees are faring in this regard?
How to assist your employees to get better outcomes
Encourage your employees to check in on their retirement investments annually. A simple approach is to:
- Take stock of where they are (current level of savings and contributions)
- Consider where they want to be at retirement (envisioned lifestyle during retirement)
- Confront the reality of where they likely will be, assuming they maintain a particular contribution level (simulated retirement outcome)
This will create a way for your employees to understand, at the very least, if they are on track to retire comfortably and sustainably. This information is key to deciding when to retire.
How employees can track their retirement investments
Employees can track their progress towards retirement goals by reviewing their net replacement ratio (NRR).
In a retirement context, NRR refers to the projection of the portion of an individual’s pre-retirement income that will be replaced by their post-retirement income. The retirement industry consensus view is that an NRR of 75% is ideal to sustain a comfortable retirement. Of course, this is an average and the true amount will differ from individual to individual.
To simplify it, if one earns a monthly income of R10 000 just before they retire, a post-retirement income of R6 000 per month works out to a replacement ratio of 60%.
The NRR helps members get a view of:
- How much they will have saved by the time they retire if they keep contributing at current levels
- How much they would need to aim to save to achieve their desired lifestyle
An individual’s NRR depends on their:
- Age – current, expected retirement age and estimated life expectancy
- Existing savings and monthly contribution level
- Assumed portfolio growth over time
- Lifestyle (health, debt and living expenses)
- Income streams – pre- and post-retirement
Incorporating these metrics into an NRR tool will help employees to determine their projected monthly income and what that equates to as a portion of their projected final salary.
Employees should try to determine their monthly income requirements in retirement years before their actual retirement date so that they can prepare adequately to maintain their lifestyle. NRRs should be reviewed at various life stages, as metrics such as salary, lifestyle and expected needs at retirement evolve over time.
How employers can access Allan Gray’s NRR tool
The Allan Gray Umbrella Retirement Fund’s NRR tool is available for active umbrella fund schemes and members on request. The tool has a component that allows employers to review the overall NRR for their employees, enabling them to gauge how many employees are on track to retire comfortably and how many may need some intervention. The tool also allows employers or their scheme advisers to tweak the various metrics to determine the impact of changing certain aspects, such as retirement age and contributions for the group as a whole.
Individual members can contact Allan Gray to request a retirement outlook statement. The statement can be generated to provide a member with a snapshot of their specific NRR.
How to improve retirement outcomes
Once individuals are aware of where they are in their retirement journey, they can take the necessary steps towards improving retirement outcomes. These include:
- Contributing more: Increasing monthly contributions helps increase the NRR. As umbrella fund contributions are a percentage of one's salary, contributions will automatically increase with salary increases. It is a good idea to prompt your employees to check in on their investments annually to ensure they are satisfied with their contribution levels. You can also encourage employees to make ad hoc, additional voluntary contributions if they receive a bonus or an unexpected windfall.
- Avoiding early access: Since the introduction of the two-pot retirement system in September 2024, all contributions to retirement funds are split into two components: One-third of the contributions are allocated to a savings component, which members can access once a year before retirement, and the remaining two-thirds are allocated to a retirement component, which is inaccessible before a member retires, and must be used to purchase a retirement income product at retirement. Any accumulated retirement investments up until 31 August 2024 (less once-off seeding) have been placed in a vested component, and the fund rules that applied on that date will continue to apply. Many members seek to withdraw from their savings and vested components without accounting for the tax implications and negative impact on potential growth, which will detract from their ultimate goal. Members can use Allan Gray’s Leaving your employer tool to help understand the potential impact of withdrawing from their vested component on their retirement outlook.
- Reconsidering lifestyle post-retirement: To allow for a sustainable retirement, members may need to rethink their lifestyle priorities.
- Delaying retirement: Delaying one’s retirement date avails more time to save towards retirement. In addition, this reduces the number of retirement years to be funded from the accumulated investment. Allan Gray’s Preparing for retirement guide, helps members who are close to retirement understand the options available to them and their most likely post-retirement outcomes.
- Seek financial advice: A good independent financial adviser can help members assess their retirement readiness and make changes to their plans, if needs be.
In conclusion, employers can play a key role in nudging members to engage with their retirement investments. Tracking retirement using an NRR tool is something the average member should be undertaking annually, particularly when their circumstances change, to ensure that they are on track to meet their retirement savings goals.