First published in Daily Maverick 168

In 1889, German Chancellor Otto von Bismarck introduced the concept of mandatory retirement at the age of 65. It was a novel idea that solved the growing youth unemployment problem, so the idea caught on in Germany and across the Western world. At that time, the state paid you to retire, but since people only lived to 67 the cost-benefit was positive.

Since then, things have changed. For one, most people fund their own retirement through savings. And for another, they are living, on average another 20 years or more, entirely on these savings. The burden on savers and social welfare systems is becoming unsustainable.

In South Africa, the problem is compounded by the fact that the average saver is supporting parents, siblings and often extended family too. This makes saving enough for retirement challenging.

“The concept of retirement needs to be revisited,” says Derrick Msibi, CEO of Stanlib. “We have been taught to start saving in our twenties, build on this wealth between 45 and 60, and then retire. But this retirement scenario is no longer feasible.”

Instead, he suggests, at the age of 60 we should be starting a second career. This means that in our late forties and fifties, aside from squirrelling money away for retirement, we should be investing in ourselves – either by upskilling or reskilling.

“The investment industry needs to be part of this thinking,” he says. “Are we taking into account this evolution? Is the advice we are giving appropriate? Are we devising plans and products for people who are living beyond 80? These are the questions we need to be considering.” 

He refers to The 100-Year Life, the 2016 bestseller by Lynda Gratton and Andrew Scott of the London Business School, where the authors predict “a fundamental redesign of life”, that takes into account increased longevity and suggests ways to ensure those additional years are fulfilling and stimulating. Beyond individuals, the book is also a call to action for politicians, firms, governments and by extension, asset managers, to rethink their strategies and policies around the “aged”. 

“This is definitely a conversation we need to have,” says Jean Lombard, executive head: recurring savings at Sanlam. “But this is not just a conversation for the retirement industry, this is one for South Africa. How do you encourage longevity in the workplace in a country where youth unemployment is off the charts?”

Complex social discussions aside, Sanlam is already seeing behaviour shifts among its client base. Older clients are working longer, but younger clients, Millennials say they have no plans to work their whole life away.

“Retiring the idea of retirement is provocative,” says Michael Prinsloo, head of employee benefits consulting strategy at Alexander Forbes. “It is not for everyone. Rather we should retire the idea of a set retirement date and adopt a more flexible approach to retirement.”

This discussion needs to happen at the employer/employee level where there are already green shoots of change. “We have noticed in the funds we administer that the average retirement date has trended up from 61 to 63,” he says. 

For compound interest to be powerful it has to have time, which is why saving from as early as possible and sticking to it, is so important.

However, the idea that people can work until they keel over is also nonsensical. This may be the norm in Okinawa, Japan’s southernmost prefecture, where people live and work beyond 100, but it is not usual. 

Retirement is made up of three phases where productivity levels gradually diminish, says Prinsloo. As health issues increase, so do costs. “Don’t underestimate the cost of retirement, and don’t assume you can fund these from dwindling earnings.”  

As the concept of retirement changes, should the products served up by the industry change? And should the policies governing retirement change? Yes, the retirement industry needs to adapt, says Msibi. “It needs to offer cheaper, simpler, more flexible products. And it needs to engage better with clients on this.” 

Regulations governing retirement are also shifting. For instance, the Income Tax Act was amended to allow people, who may have retired from their primary employment, to defer the retirement of their policy – enabling a longer period of capital growth. 

Whether Regulation 28, which governs asset allocation within pension funds, needs amending is a highly contested point. 

“I don’t believe Reg 28 is overly stifling the ability to grow nest eggs,” says Prinsloo. “It has encouraged diversification within limits and it comes with significant tax breaks. It is reasonable for the government to expect that that money is invested prudently in return. Allowing some flexibility on a risk-adjusted basis will likely be positive.”

The big frustration at the moment is the limits on offshore investment. This is something the South African Reserve Bank is exploring as it continues on the path of exchange control liberalisation. While the JSE has been a recent culprit, poor returns are often a function of poor behaviour. 

People don’t preserve assets when they change jobs. Regardless of any potential changes to Regulation 28, or new products and innovations from the savings industry, there remains one immutable truth. “The law of compound interest over time is like Newton’s law of gravity – it’s absolute,” says Lombard. 

“For compound interest to be powerful it has to have time, which is why saving from as early as possible and sticking to it, is so important.”

In other words, by all means change jobs, change careers, take a sabbatical, go travelling. Just don’t fund it from your long-term savings. DM/BM