Employers play a crucial role in retirement savings in South Africa. Many employers recognise the important role employer-arranged retirement investments, such as umbrella funds, can play in supporting employees’ long-term financial wellbeing and attracting and retaining talent.
While employers who offer a retirement fund benefit have a fiduciary responsibility to safeguard the financial interests of members, legislation gives little guidance on how to encourage and promote healthy, long-term employee contribution rates. To address this gap, behavioural finance can offer employers practical strategies for improving employee saving habits.
Learning from the behavioural finance experts
Human beings aren’t naturally wired to prioritise long-term investing. This tendency has been studied extensively by Nobel Prize-winning economist Richard Thaler and behavioural finance expert Shlomo Benartzi, whose research led to the development of the Save More Tomorrow™ (SMT) strategy. SMT is a behavioural tool that helps people overcome savings inertia by gradually increasing retirement contributions – without the sting of reduced take-home pay.
How the Save More TomorrowTM strategy works
The SMT concept is built on three key behavioural insights:
- Present bias: We place greater value on immediate rewards than future ones. SMT sidesteps this by encouraging employees to commit today to saving more later, typically with salary increases.
- Loss aversion: People experience pain from losses more intensely than the pleasure of a gain. By linking contribution increases to pay increases, SMT prevents take-home pay from shrinking, reducing resistance to saving more.
- Inertia: Once in place, most people don’t opt out of a system. SMT uses this by automating contributions, turning inertia into savings growth.
From theory to practice: The glide path
Employers who offer an umbrella fund can consider incorporating a glide path. The glide path, like the SMT strategy, helps members gradually increase their retirement savings contributions over time, using their future salary increases. A glide path is tailored to the requirements of each employer. Below is an example of how this can play out:
- Minimum contribution of 7.5% of pre-tax salary
- Annual escalation of 1% takes place automatically, in line with the salary increase cycle
- The glide path is capped at 15%
Let’s look at a real-world example. Meet Thandi:
She earns R20 000 per month and currently contributes 7.5% of that (R1 500) to her retirement fund.
Thandi opts in to the glide path, with her contribution rate increasing by 1% each year, aligned to a 5% annual salary increase, as shown in Table 1.
In just five years, Thandi almost doubles her monthly retirement contribution – from R1 500 to R2 796 – without ever seeing a drop in her take-home pay. Over decades of employment, this steady increase has a compounding effect, significantly boosting the final value of her retirement savings.
This simple strategy builds long-term financial security, while helping individuals overcome the mental hurdles that often make it hard to save more.
What may start as a gentle nudge can lead to a profound shift – not just in contribution rates, but in financial outcomes. For employers, it is a powerful, practical way to foster a culture of saving, and to help more South Africans retire financially independent.
Source: MoneyMarketing – Belinda Carbutt
