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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 chose living annuities.

      Here are the basics of a traditional life assurance annuity:

       You receive a fixed amount from the annuity for life. Once bought, it cannot be swapped.

       The annuity can be linked to inflation or another pre-specified figure for a fixed annual growth. If you choose a level annuity without an inflation adjustment, you will rapidly reduce your spending power as a result of inflation.

       You can add a death benefit. You can make your partner one of the beneficiaries for life, or guarantee an amount that will be paid as a pension to you or your dependants for a fixed number of years, whether or not you are alive.

       You can also purchase a with-profit annuity, which guarantees your initial pension. Future increases will depend on investment market conditions and how the underlying markets perform. But with-profit annuities also smooth out the market returns, paying you less in good years and paying out more in bad investment market years.

      Once an increase is granted it cannot be taken away in the future. If you have a with-profit annuity, even with the markets performing badly because of the COVID-19 pandemic and South Africa’s losses to kleptocracy, you will never receive less than you are already being paid. What is likely to happen is that you will receive lower (or zero) increases in the years ahead, but what you receive now is guaranteed.

      And here are the basics of a living annuity:

       You can draw down between 2.5 and 17.5 percent of the capital amount annually. This is apart from the four-month COVID-19 crisis change by the government to decrease or increase from the current minimum of 2.5 to 0.5 percent and the current maximum of 17.5 to 20 percent for four months. You can also increase or decrease by any amount within the scale.

      The government’s COVID-19 exemption will make little difference. According to Alexander Forbes’s research, if you increase your pension by 1 percent, it will reduce your point of ruin by half a month, and for 2 percent by a month.

       The lower the drawdown you choose, the more likely it is that your living annuity will last and you will delay reaching a point of ruin.

       You decide on the underlying investments either on your own or with the help of a financial planner. This is where many investments have failed over the years, as the underlying investments were too high risk for an income-based source of money.

       You can leave what is left of your living annuity to dependants.

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