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Wealth Management

Compound interest is why employees must keep retirement saving invested between jobs

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Wealth management

By Vickie Lange, Head – Research, Best Practice & Academy at Alexander Forbes

 

Millions of South African employees rely solely on the money saved in their employers’ retirement fund to earn an income in retirement. However, for most, this money is insufficient to sustain them.

Alexander Forbes Member Insights 2021 reveals trends and statistics on close to one million members and their saving for retirement. It was published in October, highlighting that only 6% of members can expect to replace the generally accepted target of 75% or more of their final salary when they retire. This means that the majority of individuals are not expected to achieve an income in retirement needed to sustain their standard of living.

 

Research, Best Practice & Academy at Alexander Forbes

Vickie Lange

Low replacement ratios at retirement

Low preservation rates of savings on changing jobs and low contribution rates are two of the main reasons for members not achieving being able to sustain their standard of living in retirement.

The minimum rate members need to contribute over a 40-year period to achieve a 75% replacement ratio is 17%. However, only 6% of our total membership can expect to achieve this. Members aged 60 and above have the worst projected replacement ratio outcomes: only 2% of these members have a projected replacement ratio of above 75%.

A total of 65% of members aged between 20 and 30 are expected to have a replacement ratio below 60% of pensionable income. The average member’s shortfall in rands between the required fund credit as a multiple of salary and the actual average fund credit as a multiple of salary was R833 179.

 

Why preservation rates are so low

Only 9% of members preserved their retirement savings when changing jobs. Financial distress is one of the reasons, with almost 20% of millennials having loans in default.

However, a common reason given by members for not preserving their retirement savings is that they are too low to warrant the trouble and expense of a preservation fund. A total of 58% of those who chose not to preserve had retirement savings of between R0 and R25 000. People need to be aware of the longer-term impact of not preserving even relatively modest amounts when they are younger because of the power of compounding.

The reality is that the amounts contributed in the early years of accumulation add the most to your benefit at retirement. Thanks to the impact of compound interest the first 10 years of your savings can contribute as much as half of your savings at retirement.

 

What can be done to improve retirement outcomes?

Regulations have been put in place to improve low preservation rates. Default preservation rules will automatically allow retirement savings to be made paid up in the fund when a member leaves their employer and doesn’t make a payment election. Our experience is that funds that members have benefited from the default rules being implemented.  The number of members preserving has increased from 8.8% in 2019 to 9.6% in 2020The proportion of assets preserved has remained almost unaffected at 48%, despite the challenges in 2020 in relation to the Covid-19 pandemic.

Retiring at 65 rather than 55 can almost double your replacement ratio.

Members should review their retirement savings to see if they are on track by seeking retirement benefit counselling or meeting with a certified financial adviser, and making additional contributions if required. In addition, they should preserve their savings when changing jobs to increase their probability of meeting their retirement goals.

 

Top 10

The customer expectations driving insurance change

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Carl Strempel, CFO and co-founder, Imburse

 

Customer expectations are continuously evolving, with simplicity and speed a significant priority in the current market. These expectations have been driven primarily by well-executed technology advancements in eCommerce. For example, many eCommerce platforms allow for instant payment and transparent tracking and delivery. Customers also have the option of availing of a chatbot, allowing for problems and issues to be solved quicker than relying on telephone customer support.

The best examples of these customer engagement solutions are integrated across multiple channels so that customers can switch from the chat-bot to a phone call to an email seamlessly, with the context and conversation retained. Companies and providers understand that there is nothing more frustrating for customers than having to explain the issue multiple times to multiple service representatives.

Customer expectations are continuously changing as mobile technology continues to make advancements. The growing prevalence of super apps that can do it all, from booking food deliveries to ordering taxis, is massively impacting customer expectations. These enhanced offerings mean that individuals are now also expecting this level of detail and personalisation from banks and insurers. Whether buying personal insurance for yourself or your family, or a CFO or risk manager purchasing commercial insurance for a business, customer expectations are rising. There is no longer an excuse for insurers to deliver a poor customer experience.

Insurers, especially in the retail and SME business, have scrambled to overhaul their customer experiences to meet modern consumers’ demands. For example, if an insurance company cannot turn around a quote for a comparison website within a few seconds, they won’t win any business. In fact, if they are not in the top three quotes with a competitive price, they are most likely irrelevant.

Carl Strempel

As a result, insurers need to think about their technology stack and how they can deliver the best possible experiences for their customers, to generate sales and improve retention. In this case, real-time API integrations into comparison websites.

Other areas of innovation are the ongoing migration to the cloud, which allows for the building of scalability and resilience in insurance carriers, as well as enabling technologies such as document ingestion, workflow automation, A.I., and payments technology delivering a better customer experience with a reduced Total Cost of Ownership for the enterprise.

First and foremost, insurance companies need to understand their customers and how they expect insurance interactions to be delivered. Following this, a technology strategy must be formed to enable them to deliver in an agile way. Being agile is significant because customers’ expectations evolve over time, and technology also changes. As a result, insurers need to understand their customers and be able to deploy relevant technologies in an appropriate time frame to meet demands.

Many insurance providers partner with innovative technology companies to deliver solutions that will support the needs of the end customer. By offering relevant payment checkout experiences, similar to those by large eCommerce platforms, insurers can increase their top line and keep more customers satisfied. Insurers can further reduce payment site costs by using external partners to manage integrations with the global payment ecosystem. This makes the configuration of payments more cost-effective and quicker than what existing IT integrations allow for. This technology can deliver a 90 percent saving on payment integration and configuration.

The advantages of technology in the insurance industry are clear. Technology enables insurers to improve coverage for customers, enhance customer experience, reduce costs and improve product-market fit. There are several new insurance business models being deployed, including embedded insurance, parametric insurance, and soon “open insurance,” which are all designed to make the customer experience more seamless and provide the right cover at the right time. When deployed in the right way, technology is a critical enabler for insurers to deliver to their customers and avoid becoming irrelevant capacity providers.

There are numerous opportunities for insurers to embrace innovation in the industry. The challenges with enterprise payments, however, are primarily transforming traditional IT systems, and maintaining multiple IT integrations with different payment technologies and providers. The impact is not only on top-line income and bottom-line costs, but inadequate payment capability also inhibits insurance innovation. Payments need to meet the needs of the modern consumer and the insurance product. These are the barriers preventing insurers from pursuing their digital transformation journeys. It is for these reasons that third-party innovative solutions prove valuable, enabling insurers to completely optimise their payment systems, for a fraction of the cost, resources, and time.

 

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Wealth Management

Rising Importance of Retail Investors

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Gediminas Rickevičius, VP of Global Partnerships at Oxylabs.io

 

Retail investors play an interesting role in the markets at large. For one, most academic researchers and hedge fund managers significantly downplay the importance of their everyday counterparts due to underperformance.

On the other hand, there has been a surge in the amount of retail investors since 2020. Investing has been made much more accessible and available to everyday folk. Combined with the global pandemic, these factors led to retail investors’ share of total equities trading volume now being close to 25%. Finally, there seems to be a push towards opening up private markets to more participants, as evidenced by EY research.

If such a trend continues, a massive influx of retail investors might increase the influence of their actions on the market. It might seem like a headache to seasoned veterans, but in many cases it might be a boon.

 

Gediminas Rickevičius

Retail investors provide cushion

As is often the case with many things in life, retail investors are seen through somewhat of a mythical lens. If one were to ask what event would define them, that answer would probably be the GameStop debacle.

It was certainly a visible and emotionally charged event that seemed to have everything you’d expect from a retail investor. Most people sought huge speculative gains through short-term trading without having access to tools that would enable such high frequency endeavors.

Additionally, some invested obscene amounts of capital, “leveraging” what they could. Often those were personal or spending loans. Some liquidated other investments to gain additional funds for the speculative play.

In the end, the event had all the hallmarks of everyone’s preconceived notions of retail investors. They were highly speculative, emotional, and chased significant gains. So, it would seem that would transfer over to other areas of investing.

Yet, some research would state otherwise, making retail investors highly useful to the market. As mentioned previously, they have begun to play a more significant role due to the increasing availability of investing.

A recent study has indicated that retail investors might be providing stability in times of market swings and crashes. COVID’s exogenous shock to the markets caused prices to tumble, but it was offset, by some margin, through the funds of retail investors.

Additionally, stabilization happens through providing additional liquidity to certain stocks. Finally, while they may seem contrarian as they pick stocks of which institutional investors think less, even if the contrarianism were true, it would still provide liquidity to stocks, which have less of it. In the end, retail investors play an important role in markets, especially during times of turmoil.

 

Retail investors talk (a lot)

Convincing someone to give up their investment strategy with all the data and potential software might be a little difficult. It’s a business that entirely revolves around knowledge intended to beat everyone else. Data and strategy sit at the core of investing.

As a result, outside of pure academical theory, any investment strategy is a closely guarded secret for institutional investors. Retail investors, on the other hand, are not quite the same. Many of them participate in various internet forums as a way of talking about strategy.

You can often find anything, ranging from simple investment advice (usually, ironically preceded by the saying “not financial advice”) to long posts discussing why some companies might be undervalued or overvalued.

Additionally, they are often posted in public forums where, while anonymous, posts are rated according to popularity. It would hold to reason then that such posts would have more sway over other retail investors. As a result, tracking large masses of small investments becomes an easier task.

Collecting such data, however, can be quite challenging. For one, there are places where retail investors congregate, but even then, there are a ton of posts going through them every day, making manual collection inefficient.

Couple that with the fact that sentiments expressed and overall influence can differ, and collecting such data for investment purposes nears to zero ROI or below. Fortunately, automated data collection methods have been developed.

Web scraping can be utilized whenever public data from the internet needs to be gathered at a large enough scale. There are plenty of solution providers online that can build complete out-of-the-box solutions that would make the collection of such semantic data easy.

 

Calculating talk

An important caveat is that even with automated public data collection, everything gathered would be semantic. There would be sentences and paragraphs expressing some sort of sentiment, which might not be immediately obvious, and have an effect that is also shrouded in mystery.

One way to calculate influence is to look for raw ticker mention volume. Quiver Quantitative has done exactly that for a certain piece of Reddit. There’s value to be found, however, pure volume likely only weakly correlates with investments.

It is entirely possible that a majority of such mentions are hidden deep in posts and comments no one ever sees. Only the crawler bot captures them, because it goes through absolutely everything. As a result, it can produce signals that miss the mark.

As scraping can collect any aspect of the data stored within the page, extracting popularity indicators and adding them to the ticker calculations would produce more accurate estimations of how impactful the mention would be.

Finally, sentiment is an important piece of the puzzle. Luckily, we don’t have to build customized machine learning models to extract sentiment. Google’s Natural Language AI and many other tools have already been developed that can serve our purposes just fine.

Combining these three factors with the general talkativeness of the retail investor can give us fairly accurate insight into the inner movements of capital from them. Whether these can serve as a separate investment strategy or enhance current ones, it is something for those who track such data to decide.

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