Know how retirement fund operates for you

2010-09-25 13:25

At the height of the ­recession, I received many calls from people who were retiring and were unhappy with their fund values or income they were receiving.

In the past few months, many have phoned asking to verify their share of the fund after having received benefit statements. The usual opening is that they are unhappy that after so many years of service the fund values are far below what they had expected and they want explanations.

First of all, fund members need to understand what defined benefit funds are, how retirement funds are funded and what impact risk costs (contributions towards insured benefits such as group life, disability and funeral benefits) have on their retirement contributions. The costing method determines how much goes towards both insured and funded benefits.

Defined contribution funds are dependent on how much a member’s and employer’s contribution amount to and how the investment portfolios perform.

Your years of service alone are not a guarantee you will receive lots of money. In practice, at the inception of the fund, the employer commits to contributing a percentage, usually 5-10% towards the funding retirement benefits. The employer contribution could be ­either inclusive or exclusive of ­insured benefits costs.

As an example, an employer could contribute 10% and 4% of that would go towards the cost of death and disability (insured benefits) leaving 6% for retirement savings (funded benefit).

Over the lifetime of the fund the cost of risk benefits changes. With the increase in HIV/Aids and other dreaded diseases and depending on the type of industry, providers of insured benefits have had to review their premiums and in many instances risk premiums have gone up by 4%. This means the employer contribution towards funded benefits is reduced.

Fund members should understand the costing on their funds and not assume that employer and employee contributions go towards funded benefits or what constitutes the share of fund or retirement investment or savings.

The other important factor is that within defined contribution funds, members – notwithstanding the fact that a great majority of them are financially illiterate – are responsible for the performance of portfolios which they have selected, let alone understand.

This lack of understanding of how funds operate is the main reason that members of retirement funds always feel shortchanged after receiving their monies. This coupled with members’ reluctance to educate themselves contributes to huge discrepancies in members’ expectations.

Most members are not aware that they are allowed to make voluntary contributions over and above the stipulated percentage of salary contribution as per fund rules.

There are some funds that also make provision for their members to incorporate educational and post-retirement savings into their contributions. It is again unfortunate that fund members are not informed about and encouraged to use this vehicle to enhance their family’s financial security.

  • Diale is a financial planner. He can be contacted on 078 775 0802

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