Successful Financial Planning for Retirement

Successful Financial Planning for Retirement

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  Interactive Symposium on"Corporate Savings & Retirement Schemes” Successful Financial Planning for Retirement Sohail Jaffer
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  Hard realities ofthe game of Cricket – An Analogy w.r.t. Insurance An uncertain Retired Hurt 2014 … a year that shocked everyone An inevitable Retirement Lack of adequate protection endangers life … 2
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  Source: Metlife No longeran automatic one-off event that occurs at a pre-set age – 60 (women)/65 (men) People are happy to keep working not just because their pensions have fallen short of expectations but also because they would miss the social interaction at workFinancial planning to encompass both saving more & working longer, to optimise the use of both financial and human capital People are living longer and are healthier, but often leave the labour force just because they reach a ‘standard’ pension age. This is a waste of resourcesPlanning could ease financial burden & enhance later life lifestyles 3
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  Source: Merrill Lynch(Bank of America Corporation) What is driving the change ? Increasing life expectancy, which has produced a retirement that can last 20 years or more Elimination of pensions for most workers, shifting burden for funding retirement from employers to retirees Recent economic uncertainty, which has been a wake-up call for many people that it is not financially sustainable to retire without some employment income Re-visioning of later life, new generations seek greater purpose, stimulation, social engagement & fulfillment in retirement. Myth 1: Retirement means the end of work. Reality: Over 7 in 10 pre-retirees want to work in retirement. In the near future, it will be increasingly unusual for retirees not to work. Myth 2: Retirement is a time of decline. Reality: New generation of working retirees is pioneering a more engaged & active retirement - the New Retirement Workscape - which is comprised of 4 different phases: (1) Pre-Retirement (2) Career Intermission (3) Reengagement (4) Leisure Myth 3: People primarily work in retirement because they need money. Reality: 4 types of working retirees: (1) Driven Achievers (2) Caring Contributors (3) Life Balancers (4) Earnest Earners Myth 4: New career ambitions are for young people. Reality: Nearly 3 out of 5 retirees launch into a new line of work, & working retirees are 3 times more likely than pre-retirees to be entrepreneurs 4
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  Source: Nielsen &Aegon Recessionary sentiment improved for most in 2014 - Global discretionary spending/saving intentions were either flat or declined slightly in 4Q14. 1-in-10 plan to save for retirement (10%). MENA – For 4Q14, Q-on-Q discretionary spending intentions increased 1% points to 6% for those planning to save for retirement. The economic outlook revives, but concerns about future retirement remain There is a strong need to undertake financial planning The solution lies in making retirement planning easier Flexibility will become the new model of retirement The emotional values people associate with retirement - Leisure 46% Freedom 41% Enjoyment 29% Insecurity 22% People aspire to have an active retirement which blends travel, family, hobbies and work - Travel 62% Family & Friends 59 % New Hobbies 49% Volunteer Work 25% Continue Working 15% Live Abroad 13% Start a Business 12% Study 12% Global retirement readiness rebounds in 2014 (5.8) > 2013 (4.9) 5
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  Most Australians don’thave enough money to retire on. Industry must be able to help retirees by providing products which generate a regular & stable income stream, provide longevity risk management & which are flexible enough to deal with unexpected life events. This will help prevent retirees over spending, and running out of income earlier than expected, or conversely under spending & leading an unnecessarily frugal life. Key Message … Case Study – Australia Source: The Association of Superannuation Funds of Australia (ASFA) & State Street Global Advisors (SSgA) The Standard incorporates expenditure on: o Communications o Private health insurance o Energy o Clothing o Household goods and services o Recreation o Transport Portfolio diversification & a greater allocation to growth assets are likely to help retirees make their superannuation last longer, at a time when Australians are living longer than ever before. 6
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  Source: Natixis GlobalAsset Management CoreData Global Retirement Index (GRI) Good economic performance backed by high quality of life gives retirees in UAE a leg up compared to other nations UAE tops ranking in old age dependency ratio & inflation indicators, suggesting that it wouldn’t face same demographic challenges as many other developed nations will, in the foreseeable futureUAE climbs one place in the rankings & continues to enjoy a spot in top 30 countries for retirement in 2015. 2015 Natixis Global Asset Management CoreData Global Retirement Index (GRI) 7
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  Source: HSBC, TheFuture of Retirement, UAE Report, 2014 “27% of pre-retirees surveyed say they cannot afford to retire” 12 years - On average, how long pre-retirees expect their retirement saving & investments (excluding pensions) to last in retirement 16 years - Typical retirement life expectancy in UAE. (based on full retirement at age 60 & average life expectancy of 76 years) HSBC - 2014 The Future of Retirement Survey On average, retirees in the UAE face a 4 year retirement funding gap 46% of pre-retirees are not currently, or do not intend to start, saving specifically for retirement 76% of pre-retirees are concerned about not having enough money to live comfortably in retirement For 87% of working age people, saving for retirement is not their main priority 55% of pre-retirees who are not adequately preparing for a comfortable retirement admit they did not start savings early enough Family and Starting a business are the most important retirement aspirations Financial hardship and poor health are the biggest retirement fears 15 vs. 9: People expect to spend 15 years in retirement, but their savings to run out after 9 years 8
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  Expats currently livingin the Middle East are more likely to consider moving away for retirement reasons than their counterparts in Europe and Asia. Retired expats are more likely to be first time expats (63% compared with the global expat average of 53%), rather than serial expats - perhaps indicating that they’re unafraid of new challenges & big changes. Source: HSBC How expats are saving for retirement globally: Retired expats are making sure they’re spending their retirement exactly how they want. United Arab Emirates (UAE) emerges as one of the costlier expat destinations, with more than half saying that they would choose to leave because it is too expensive (60%) or for retirement (23%). 9
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  Source: Source: Manjoo,(2012), An Appraisal of Longevity Risk: Conventional and Islamic Perspectives., Kuala Lumpur: ISRA, Booz & Company Analysis Three Pillars of Retirement Planning Three-Pillar System State Pension (Social Security Schemes) Occupational Pension Private Savings Secures a minimum standard of living Maintains employee’s current standard of living Covers additional needs Financed with employer and/or employee contributions Financed with personal savings Privately managed Financed with (payroll) tax Publicly managed Privately managed Pillar 1: State Pension (Social Security Schemes) Only cover nationals - Social security schemes in the Gulf Cooperation Council (GCC) cover nationals & are very generous defined benefit arrangements Replacement ratio of 80% Most national employees retire by age 60 with their social security schemes paying 80% of what they were earning prior to retirement Young population demographics Median age in twenties but it will increase in near future due to increases in life expectancy and decreases in fertility rates Huge drop in old-age support ratio by 2050 Ratio of contributing workers to retirees is expected to drop from the current level of 25:1 to approximately 3:1 by 2050 Current partially funded schemes are unsustainable and governments are introducing reforms albeit at a slower pace 10
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  Pillar 2: OccupationalPension (Gratuity) in GCC US$ 5 billion Value of unfunded end of service gratuity payments in the UAE (estimated by Milliman) 67% of corporates Expect an annual increase in their total salary expense of over 5% over the next 3 years Findings of a recent employer survey on End of Service Gratuity What do you do with ESG* funds? Interest in establishing a trust for ESG* funds 54% 24% 22% Part of working capital Don't know Invested 36% 8% 56% Yes Already established Not under consideration Only 8% of corporates have implemented an End of Service Gratuity (ESG) funding mechanism Corporate Savings Plan – Value Proposition for Corporates End of Service Gratuity funding The Plan provides a mechanism for employers to fund end of service gratuity (ESG)* Competitive Group Benefit Program Corporates can provide employees a cheaper way to access retirement planning, by offering the Plan to employees Enhance Employee Retention Corporates can reduce cost of recruiting & training new employees Source: SEI: Employment trends & managing End of Service Benefits in the Middle East * Employers are required to pay ESG to employees under UAE labour 54% of corporates have or are interested in separating assets in order to protect and ear-mark assets to fund ESG • Good employee benefits attract and retain talented staff • Happier employees, with peace of mind, are more productive 35% - HR decision makers list employee retention as top objective • Vesting scales support employee retention 11
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  Corporate Savings Plan– Benefits for Employees Disciplined Retirement planning Access to disciplined retirement planning through payroll deductions Regular savings (percentage of salary)Institutional investment funds Gain access to institutional investment platform Minimize leakage The Corporate Savings Plan provides a cost effective way for employees to access retirement planning0% external Investment Fund Placement Fee Benefit from 0% external investment fund placement fee. No entry or exit fees charged on underlying investment funds (no bid-offer spread) Segregated Assets Asset held by an off-shore trust or reputed custodian Corporate Savings Plan – Risks in Corporate Savings Plans Employees decide the investment strategy for their contributions Employee contributio n plan As this is a defined contribution plan, employees can decide whether they wish to make contributions. Employee selects investme nt strategy Each individual employee selects the investment strategy for their voluntary contributions. Investme nt values fluctuate Investments fluctuate in value. Each investment strategy has a different risk / return profile. There is no investment return guarantee on invested contributions and the actual return will depend on the future performance of the employee’s investment strategy. Employee s bear risk / reward of their strategy As this is a defined contribution plan, employees can decide whether they wish to make contributions. Effective employee communication strategy is required to mitigate the above-mentioned risks 12
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  Corporate Savings Plan– Digital Applications Hassle-free - Enrolment & Administration Efficient Enrolment Efficient Plan Administration Automated calculation of Benefit payments Contribution & Investment record keeping Customer- centric business model What does it mean to be digital? Digitization is not just about enrolment & administration through electronic channels; it has the potential to transform operational processes, reducing HR time & cost associated with running an employee savings plan Hassle-free set- up Streamlined digital system for enrolment and administration Separate tracking of each of the 3 contribution streams Funds ear- marked by member employees Transparent fee structures and full disclosure Continuous support 13
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  The Way Forward– Reforms Needed to Encourage Private Corporate Savings Schemes In addition to the employees’ retirement goals, private corporate savings schemes would help achieve the economic and financial goals of the region by contributing to the development of the region’s capital markets and improving the efficiency of labor markets The current social security schemes are unsustainable and reforms would be needed to encourage private corporate savings schemes Proliferation of Corporate Savings Plans in GCC will enhance employee well being, talent retention and augment employee productivity 14
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  Retirement is ajourney not a destination Abraham Lincoln Words of the wise – worth remembering 15
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  Thank You Sohail Jaffer ManagingDirector Business Development Insurance Services Capita Middle East DIFC, PO Box 49983, Dubai, UAE Mobile: +97150 429 6876 Email: [email protected] The information in this presentation does not constitute a sales offer, investment advice or an offer for the acquisition of financial products, and shall not in this regard imply obligations for the entity or anybody else towards the readers of the presentation. This presentation is solely intended to provide information on matters of interest for the readers and as such information is not meant to replace the knowledge and the judgment of the readers who should make all appropriate inquiries.