Recent research by Alexander Forbes 2021 Member Insights shows that the Covid-19 pandemic had a more significant impact on South Africa’s millennials due to high unemployment rates – and they’re unlikely to afford retirement.
Millennials are people aged between 25 and 40 years. This generation has already lived through two financial crises during their careers, and they make up more than 50% of the membership of South African retirement funds.
Covid-19 pandemic fallout victims
The Covid-19 pandemic caused a tectonic shift towards short-term survival.
The pandemic emphasised the need for financial services such as medical aid, life insurance and emergency savings.
During the initial lockdown, retirement funding was used to release cash flow to employers and employees by suspending retirement fund contributions.
Former Finance Minister Tito Mboweni had allowed people emergency access to a portion of retirement funds as part of broader reform measures.
“Millennials have been hardest hit financially by Covid-19 and are at the highest risk of loan defaults,” said Alexander Forbes, Head of Research, Best Practice and Academy Vickie Lange.
“The analysis found that at least 14% of loans taken by early millennials (aged between)were in default, followed by late millennials at 5%, generation X 2% and baby boomers at just 1%,” she added.
Millennials are disillusioned with retirement
According to Alexander Forbes Executive Strategy and Customer Experience manager Viresh Maharaj, retirement planning companies like Forbes are at risk of becoming irrelevant to millennials.
“Retirement is simply not on the ‘must have’ radar for this generation and most of the other generational groups until they are within about ten years of retirement,” said Maharaj.
“A unique characteristic of millennials is that many of them are living the experience of a defined contribution retirement outcome via the challenges their parents now face in their old ages,” he added.
Millennials have become broadly sceptical of financial services due to watching their parents struggle to survive solely on their pensions.
They have to partially or even fully support their parents and in-laws in their retirement because the living costs typically include extras like medical aid contributions.
At the same time, they have to meet the demands of raising children in the context of ever-increasing living cost pressures.
“The immediate challenge facing such households is simply to make ends meet, which is increasingly difficult to achieve,” said Maharaj.
Social media influences millennial spending habits
Maharaj was scathing in his assessment of millennial spending, saying that financial behaviour is heavily influenced by ‘professional posers’.
“Millennial views of spending are influenced on social media by professional posers promoting lifestyle choices only accessible to most by swiping, tapping or extending their credit,” said Maharaj.
Millennial spending behaviour is worrying for financial services providers in the retirement space because the target market is choosing to forego services like retirement savings.
“This plays itself out in the employer-sponsored retirement funding space in the form of the non-preservation of retirement funds when people change jobs,” explain Maharaj.
When changing jobs, customers are given a choice to move their pensions to another retirement account or cash out immediately.
94% of the time, the default response is to opt-out of the retirement funding journey and access their cash.
“Approximately 94% of this generation are choosing not to preserve compared to 84% of the older generations.
Maharaj said retirement saving companies have to help their target market address their present needs to connect with this generation and remain relevant in the future.
“To help our customers save for tomorrow, we must help them survive today by considering their point in time financial needs such as indebtedness and budgeting,” concluded Maharaj.