Retirement education: isn’t this a life skill?

People who understand how to create their own wealth have motivation to optimise it.

Dave Crawford

Published on Moneyweb 11th March 2019

Levels of employee engagement tend to rise when companies educate them about their retirement benefits.

There was a time when many South African employers offered their employees guaranteed pensions when they retired.

These were called ‘defined benefit’ pension funds.  The defined benefit was usually a formula that promised employees 2% (or a similar percentage) of their salary for every year they worked for that employer.  An employee who worked for such an employer for 40 years would therefore receive a pension of 80% of their salary when they retired.  The salary figures that were taken into account usually excluded bonuses and allowances.  This pension was guaranteed by the employer.  The employer and employee both contributed fixed amounts each month to such funds.

Every three years the actuary to the pension fund would value it to see if it had enough money to make good on the guarantees.  If there was insufficient money in the fund, the shortfall would be made up by the employer who, after all, had guaranteed the benefits.  So they employer took responsibility for the financial risk and the employees knew exactly how much pension they would receive.

‘Defined contribution’ funds mean less certainty

From the late 1970s until now these funds have mostly been shut down and their values transferred to what are called ‘defined contribution’ funds.  In this arrangement, both employer and employee make fixed contributions to the pension fund.  These fixed contributions are percentages of the individual’s salary.  When a member reaches retirement they will only have the amount of money in the retirement fund at that time to retire on.

So the full investment risk of retirement has now been transferred to the employee.  Unfortunately that employee has no way of knowing whether or not they are saving enough to ensure a comfortable retirement.  Most assume that the pension fund will see them right if they belong for long enough, but this is a flawed belief at best.  This problem extends from CEO to general worker.

Richard Glass, an American pension writer, put it this way in 2010: “The process workers should utilise in determining their retirement income needs and funding requirements is essentially the same as that used by large defined benefit plans in determining their liabilities and contribution requirements.  Unfortunately the average worker is ill-prepared to take on this task.  To make matters worse, [they] are unfamiliar with the magnitude of the problem.”

Few even realise that a problem exists

People who manage retirement funds are responsible for making sure that the funds run like clockwork and comply with all legal requirements.  They are also responsible for providing members with appropriate information about the fund.  That information is not knowledge.

The next logical step for most people is to approach a financial advisor.  Sadly most advisors are only interested in dealing with what are politely called ‘high net worth individuals’.  Further, financial advisors are neither inclined nor trained to educate people.  They may have the finest intentions, but they are conflicted because their income comes from annual fees paid on products they are able to convince individuals to invest in.

Clearly, members must be able to understand their situations well enough to make informed financial decisions.  And for this they need education, and especially education from unconflicted sources.

John Anderson, a well-known actuary in South Africa, had this to say in a note published in 2012: “There are insufficient support structures in place to help members make the right choices. 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.”

It thus makes sense for education in this area to be provided as an employer initiative.

Teaching employees how to integrate their company provided benefits into their personal financial lives improves their chances of having a financially comfortable retirement.

If individuals understand how financial products benefit them there is less chance of them falling prey to exploitation at their most vulnerable, when retiring or being retrenched.

How does a company benefit from paying for the education of its workforce in regard to the benefits they receive?  The answer is simple: engaged employees have greater goodwill towards their employer.  They put more effort into the achievement of business objectives.

Rod Burn, former director of operational performance at PPC, actually measured this effect using an anonymous internal perception monitor.  Because of the very positive results in this area he remains curious as to why this aspect of training has been so widely neglected.

People who understand how to create their own wealth have motivation to optimise it.

While the basics are simple, and the costs of such education are minimal, the benefits to both employee and employer are substantial.

* Dave Crawford is a certified financial planner and founder of retirement training firm Planning Retirement.

This was the first comment after the article was published.

I thought this needed answering.  So I sent the article and the comment to Rod Burn who was mentioned in the article, for comment.

Here’s what he had to say:

Dear Think_B4U_Reply

It has often been posited that high levels of employee engagement result in improved business performance.  It all depends what is meant by employee engagement and improved business performance.  Employee engagement is not the act of giving employees what they want until they reciprocate with obedience and a little extra effort. Neither is it a negotiation or a trade.

When soldiers are willing to die or be maimed in battle, they are “engaged.”  They wouldn’t do it otherwise.  They become willing to sacrifice their lives for a “cause.”  Employees are “engaged” when they become willing to surrender self-interest to the “cause“ of the business.

The factors which will cause employees to become engaged are not that many, but may vary in intensity and priority from workforce to workforce.

Pay is almost always a powerfully persuasive factor.

In PPC, investigation showed that most employees did not consider the company contribution to their retirement fund as “pay.” They were only interested in take home pay.

Their immediate financial predicament took priority over retirement provisioning. PPC changed that over time by making employees aware that the take home pay that they would have after retirement was in fact being earned right now.  It required skilful and patient retirement funding education to change the mindset.

Employees were shown how to calculate how much capital they would need at retirement to fund their chosen post retirement lifestyle, and were shown how to assess the adequacy of their monthly and annual retirement savings levels. It sounds simple, but even at senior levels of management; ignorance in this regard was rife.

Employees were made to understand that one day they would be paying themselves a monthly salary, and the amount that they would be able to pay would depend on decisions which they took now.

This ongoing education and instruction provided by the company was subsequently rated as “invaluable” by employees at all levels and the employee perception monitor showed that employees were “extremely satisfied” with the company contribution to their retirement fund.

By showing attentiveness to the employees’ retirement needs (without having to give anything away) the company was able to get the employee to align his or her ”cause” with the company cause. That’s how engagement is created.

If an employee believes that he or she is more certain to achieve a personal goal by working with the business rather than against it or without it, they are ”engaged.”

It is important to note that this mindset was not achieved by sending employees on a two day course.  Changing the mindset required ongoing company intervention, guidance and instruction.

Rod Burn 16th March 2019