Words: Peter Fairbanks
The pension game, as in most capitalist countries, is a big money spinner for product suppliers and Fund Managers. Every month, massive amounts of money flow through various channels, such as Pension and Provident Funds and Retirement Annuities, which Fund Managers use to buy equities and boost stock exchanges, thus securing sustainable growth for their investors. So when it comes to equity growth, pensions are regarded as one of the single biggest resources.
It therefore comes as no surprise that product suppliers want a piece of this lucrative pie and will fiercely protect their inflow at any cost, by making their pension products as attractive as possible to you, the investor. When you consider that the main players in this game have approximately one million Retirement policies on their books and they collect a minimal fee of R20 per policy, per month, we’re talking about seriously big numbers and good business.
The 'latest' marketing tool being used in the retirement business is the bonus fund concept, whereby clients who keep their products for the full term receive a bonus allocation. However, this incentive is not new, as some of the main role players have offered a combined product on and off since the 1970s. This practice died down in the early 2000s because of new generation thinking in the market, but it appears to be back with a vengeance over the last year or two.
As a hard-working citizen, you probably do not have the time to delve into the finer details of what you are being offered by product providers, so I thought this would be a great opportunity to give you a general guideline that will help you make better-formed decisions. I must admit though that after spending a ridiculous amount of time reading through contracts, I was more confused than a peach blossom in the middle of winter – and I’m in the business. So I delved some more and will try to explain my findings on this confusing subject as simply as possible.
My biggest gripe with some products that offer a bonus is that a lot of effort is put into the marketing of this ‘must have’ combined product, but there is very little follow through. By this, I mean that the bonus will vest*. But if you are interested in taking up such an offer – and there are some good products around - you need to:
• Read ALL the small print and ask questions before you sign your life away.
• Find out if the bonus allocation will be affected if you reduce or stop paying your premium.
• Check if your bonus will be affected if you reduce your Life cover.
• When scrutinising a product, your main guideline must be the *Reduction in Yield (RIY) as a factor over the term, to evaluate if it is a decent product or not.
In today’s tough economic climate, the chances of an investor reducing or stopping their pension contribution is a very real possibility. Should this happen, the investor will only see the ramifications of their actions when they are about to retire and suddenly realise that they won’t receive the promised bonus they had hoped for or were told they would get. By that time, it is too late. So what are the options? Either make do with what they have to eek out some kind of existence or try to keep working to live – both are not ideal situations to be in. The point that I want to get across here is that if an investor stops or reduces their pension contribution, they should only do this as a last resort because of the dire consequences it will have at retirement age. Unfortunately, I don’t have statistics to back me up here, but with some 14 years of experience as a financial advisor, I would be surprised if 20% of all investors kept up their premiums for the full term. Just like some gyms count on a large percentage of their members not using their membership, some product providers bargain on the investor not being able to keep up their premiums for the full term.
Product providers also use different criteria to determine what the bonus payout will be. It may be that you only get a percentage back of what you paid in or it could be a set amount on the variable costs. But how this is calculated is irrelevant because I can promise you the sky and Earth if the word vest or guaranteed is not stated. Don’t take anyone’s word for it; ask to see it in writing.
Rewards vs. bonuses
Don’t confuse *Life Cover rewards with *Retirement Annuity bonuses. For example, one role player recently issued a Life product that will fulfil your wildest dreams if you don’t claim for disability or dreaded diseases for an obscenely long time. Be warned though, these guys have their stats in place and know that as few as 10% of the people who buy this product will be entitled to claim their money back for successfully completing the term without claiming or replacing their Life cover before the set term.
All in all, I still believe that there are a number of great products available and we have a tax-support system to help us save for our old age. Personally, I would rather pay 10% of my policy cost to receive 90% of my income at retirement age, than argue about cost and end up being one of the 90% of people who will live in poverty at retirement age.
As always, I encourage you to seek advice from your broker before acting.
* Vest - This means that you have earned or accrued the right to a retirement benefit payable at a later date even if you terminate employment before you retire.
* Life Cover or Life Insurance - This is an insurance product where you agree to make a monthly payment to the insurance company in return for a lump sum payment to your family should you die. In most cases, you pay a monthly amount over a set time frame (20-30 years typically) and the life company agrees to pay your family an agreed amount should you die during this time frame. This is known as term insurance.
* Retirement Annuity (RA) - This is a pension plan designed to build a lump sum that is paid out to you when you retire.
* Reduction in Yield (RIY) - This is an industry standard figure given to show the amount by which an insurance company's charges can be expected to reduce the investment return on a policy.