These FSCA lists make a lot of sense and should be followed by all annuity holders!
Now look at your expected average age of death. According to figures from the Actuarial Society of South Africa (ASSA), any female who reaches age 60 can be expected to live until 84, and any male at age 60 can be expected to live until 78 (these estimates apply to people who earn more R30 000 a year). For a couple aged 60, there is a 50 percent chance that at least one of them will still be alive at age 90. But these are averages – a lot of pensioners will live beyond these estimates.
If you want to live free of the point of ruin, you need to reduce your odds of running out of money. Your target should be to hit the 10 percent chance of living to 90 rather than assuming you will be part of the 50 percent average. This means that males must look ahead to reaching age 90 and females to 100, resulting in a planning horizon of 35 to 40 years.
Assuming an initial investment return on the average of 50 percent, only females with a drawdown rate of 3.44 percent (at most) can expect to be virtually free of their point of ruin; and only males with a drawdown rate of 4.22 percent (at most) can be more or less sure of their income until death. Any higher initial drawdown will lead to ruin.
But these tables are likely to be on the optimistic side. There is a lot of research both here and overseas that indicates that at age 60, you should not have a drawdown rate above 4 percent.
The problem is that many South African living-annuity pensioners are currently in serious trouble. With an average drawdown of about 7 percent, they are already beyond their limit.
Another problem is the structure of averages. Living-annuity pensioners are affected by the amount of capital they have, thereby generally understating the average drawdown rate if one were to determine it by the number of pensioners. In addition, the average figures don’t show which pensioner groups are most vulnerable.
The richer people, of which there are few, make up the money weight on the upside of the averages because they have lower drawdowns, often as low as 2.5 percent, and many will also reinvest their pensions in new investments. Meanwhile, people with a medium to low income, who make up the numbers, are typically on the lower side, drawing far more than the 7 percent average. So, while you have one pensioner below the 7 percent drawdown, you will also have 10 others drawing down far more than 7 percent.
Recent research by Alexander Forbes, based on the retirement funds it administers, shows that many pensioners were already in serious trouble before COVID-19. The lockdowns to combat the virus and the resulting investment market downturns have just made the situation a lot worse.
John Anderson, an actuary and a leader in retirement research, says that from Alexander Forbes’s research, it is clear that many South African pensioners are already in a bad way because of decisions they made as far back as 20 years ago when they retired – and this is apart from most pensioners saving too little while they were still employed.
COVID-19 is going to see many more pensioners hit their point of ruin far more quickly than they would have anticipated. They need to act now to try to rectify their financial positions.
THE PRE-COVID-19 PANDEMIC SITUATION
Alexander Forbes recently released its first major research on the financial survival of retirement scheme pensioners in South Africa – and it does not make good reading.
Worryingly, this research was done before the COVID-19 outbreak took hold and Moody’s downgraded South Africa to a non-investment-grade rating status. The situation now is likely to be far worse.
The research looks at a number of issues, including retirement dates, choice of annuity (pension) and how much capital retirees have at retirement. The main issue, however, is this: do South African pensioners have enough money to last from their date of retirement until their death? The answer for most is no.
Anderson, who headed the Alexander Forbes research, says that many retirees were already going to have to cut back on spending and rely on others, such as their children and relatives, to survive. If pensioners are young and fit enough to work, they need to get out there. This is a good option for those who are able to supplement their income. However, the older you are and/or the more ill you are, the less likely you will be to find a job.
The Alexander Forbes survey is based on research on 11 594 pensioners who retired between 1992 and 2018. They retired with a combined capital of R26 billion, which works out to an average of R2.2 million each.
But break down the average by income group, and the figures look very different:
Table 1.8: Retirement capital by income group
| Retirement capital | Percentage |
| R0 to R600 000 | 24% |
| R600 000 to R1.5 million | 30% |
| R1.5 million to R5 million | 36% |
| R5 million to R10 million | 7% |
| R10 million to R20 million | 2% |
| R20 million plus | 1% |
The next thing to look at is your replacement ratio. This is the percentage of your final pay cheque that you will receive as an initial pension, without any add-ons such as a car allowance.
Most retirement funds work on providing 75 percent of basic income after 40 years of service.
This is what the Alexander Forbes research shows:
Table 1.9: Replacement ratios by percentage of retirees
| Replacement ratio | Percentage of retirees |
| 0% to 20% | 44% |
| 20% to 40% | 26% |
| 40% to 60% | 13% |
| 60% to 80% | 10% |
| 80% plus | 7% |
In other words, at least 85 percent of people simply did not save properly for retirement. Anderson says that the main reasons for this are that they didn’t save enough, or they cashed in their retirement funds and spent the money when they changed jobs along the way.
Some people also have additional savings outside of their formal retirement funds. Although such cases are not included in the study, this is unlikely to materially change the overall picture.
Other Alexander Forbes research shows that of more than one million contributing retirement fund members included in other research on people who resigned or were retrenched or fired in 2019, only 8.75 percent preserved their retirement savings. This is down from 11.5 percent in 2012. Most of this lack of preservation takes place when members are under the age of 50, which means that they lose a lot more by not having the power of compounding working on their investment returns.
Anderson says that during the current tough times being faced in South Africa, the number of people preserving their retirement savings may reduce even further.
Once people reach retirement, they have to make a choice about retirement annuities. This is the money that most people will spend for the rest of their lives, and it is a critical choice.
There are two main types of retirement annuities (pensions): one is a guaranteed traditional life assurance annuity, where the pension is guaranteed and once you have made your choice you cannot change it, and the other is a living annuity, where you make the investment choice and the underlying investments (with or without the aid of a financial planner). About 90 percent of pensioners
