An assessment : defined contribution funds and retirement

Abstract

Dramatic changes in medical science and a general improvement in living standards has led to significant reduction in the morality rate of certain age groups in South Africa. As a result the average age at which people are likely to die increased significantly in the 2oth century. The implications of this has not only to increase the number of people who survive to retirement age, but it has also seen larger numbers of people live for much longer periods in retirement. Opposite to the above, is the HIVIAids pandemic, which will increase the mortality rates of individuals at a younger age and undoubtedly affect pension plans and the costs thereof. The effect of all these changes have been the ultimate cost of providing a given pension benefit. At first the paper examines the trend in retirement saving away from Defined Benefit (DB) towards Define Contribution (DC) funds. It looks at the reasons why this shift has occurred in South Africa, and provided confirmation of the retirement savings plans away from DB structures and towards DC type of plans in South Africa. Secondly the paper briefly looks at the operation of DC plans in South Africa. The potential consequences of the shift are then reviewed in the context of role players in the retirement savings decision and personal involvement in retirement planning process. Upon completion of the literature study, a model was developed in which data from DC funds were used to make projections regarding the sufficiency and adequacy of funding within DC funds. This study has proved that the shift from DB to DC funds had an enormous impact on provision for retirement. It was found that a significant part of the population will not be independent at retirement and therefore might potentially became a responsibility of the state. The paper suggests that the level of personal involvement in the retirement savings decision may be a critical factor in determining the propensity of an individual to save for retirement. As a result research is proposed to consider the importance of the three elements in the involvement of the individual in the retirement savings decision: the perceived ownership of retirement savings, the awareness of the need to save for retirement and the understanding of how to save for retirement.