FEATURE RETIREMENT
31 January 2020
Discovery extends sharedvalue approach to investing
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iscovery has extended its “Governments around the world shared-value approach that see longevity as major problem and revolutionised medical aid some are increasing the retirement around the world to its investment age,” Sher says. products. The group is now rewarding its clients for investing longer, investing Fees reductions more, living well and withdrawing While the retirement industry focuses wisely, as people are inspired to make on fees reduction, this, says Sher, “will better choices if they see both a longonly get you so far”. He points out term and an immediate benefit. that there has been a lot of rhetoric in Craig Sher, Discovery Invest’s the market about fees, but an analysis Head of R&D, paints a grim picture carried out by Discovery Invest of retirement in the country. “94% shows that cheaper fees aren’t what of South Africans cannot afford changes an outcome for a client. “The retirement. It’s a well-known statistic real impact comes in making people that everybody has been quoting for change the way they save – and if they years,” he tells MoneyMarketing. save for longer, the impact dwarfs any Only four out of ten South Africans impact that lower fees make.” preserve their retirement savings when Kenny Rabson, CEO of Discovery switching jobs and, before age 30, it’s Invest, points out that when brokers closer to zero in ten. “And more often compare LISP platforms, they carry than ever before, people are changing out comparisons of what the platforms’ jobs – around every two or three years,” fees are, to ascertain which platforms Sher adds. are cheaper than others. In addition, savings terms have “Discovery Invest is an alternative been reduced and people spend much to all of that – and a LISP platform more time in retirement with a difference. than ever before as they We make sure THE RETIREMENT live longer. And when our fees are they’re in retirement, GAP IS BIGGER AND competitive and they draw down money at the end of the MORE UNCERTAIN day if people irresponsibly, with the THAN THOUGHT result that they run out want a generic of funds and become LISP, it’s there for reliant on the state, or on their children. them. But there is a different process “They think they have a large pot for advisers in terms of trying to of money but what they don’t realise change the outcome for their clients,” is that it has to last for 30 or 40 years,” he adds. Sher says. “You’d think that an initial “We need to do a lot more – and drawdown rate of 6.6% isn’t too bad – the industry and advisers need to do but that may only last around 12 years.” a lot more to give people a reasonable The retirement gap is bigger and retirement. This is an international more uncertain than thought. The issue and not unique to South Africa. number of people living beyond the “The move to passive investing age of 100 is doubling every decade. By has helped a bit in the United States 2050 it is estimated that there will be because companies went from 2% in over two million people older than 100 active fees to four basis points, and worldwide and lifestyle improvements that is going to make a difference over will extend longevity even further. In 20 years in a highly efficient market, addition, perception is a problem as but passive hasn’t done well in South people take only average life expectancy Africa because the cost saving is into consideration, which is variable, not nearly that dramatic and it’s so and many will live longer. dependent on what certain stocks within the index do.” He points out that Discovery Invest’s proposition is a very unique one in the South African market. “This is the same basis on which the business was launched in London.” Kenny Rabson, CEO, Discovery Invest
Shared value model Using the history of the Vitality programme, Discovery Invest knows that it can make people go to gym for a cup of coffee. “That’s how incentives work and through them we’ve seen real changes happening,” Rabson
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says. “Our offering isn’t just different product – it’s a different philosophy of how we’re trying to take a broker and client forward.” The retirement challenge is a behavioural one, Sher adds, referring to Harvard academic Michael Porter’s Shared Value business model where customers, society and the business all benefit. If people save sooner and more, then additional value arises. It means that Discovery Invest has assets under management for a longer period of time, and it is earning fees for a longer period of time. “The added value is then shared with the client, when profits are channelled towards rewards that encourage good investor behaviour,” Sher says, “and it’s exactly the same as the Vitality model we have in healthcare.” Clients are rewarded for investing early as Discovery Invest will then add a pot of its own money to the investment. “If you invest R100 000, we put in up to R25 000,” says Sher. “You just need to stay invested for the entire term and you keep all the growth of the R25 000.” He adds that when additional contributions are added, a boost of up to 30% will apply. If clients withdraw wisely and manage their health, they can receive a boost of up to 50%. Financial planning tool To help clients better understand the impact of living longer on their retirement savings, Discovery has, in collaboration with the University of Cambridge and RAND Europe, developed a financial planning tool that incorporates a personalised life expectancy algorithm. The Retirement Modeller clearly shows how behavioural choices influence life expectancy and retirement outcomes, and focuses on a client’s individual needs. “You put in your details and it calculates how long you are going to live, and then it works out your retirement plan so that your funds will last,” adds Sher. The Modeller brings people’s health into their financial planning and this makes it unique. Incentives are working and Discovery Invest has seen results. Savings terms have risen by three years on average, with additional investments into retirement plans increasing by 173%. After retirement, 3% less is withdrawn from living annuities each year.
Umbrella fund The shared value model has also been applied to Discovery’s umbrella fund, Rabson says. “We say if you bring across your umbrella fund to us as a company, each member will receive a boost based on their term to retirement – and through healthy living, employees can earn a boost of up to 15% on their monthly contributions.” Through digital intervention, employees can manage their own retirement. “Unlike traditional pension funds that don’t interact at all with employees, we have the ability to talk to the employee through an app. It becomes personalised as opposed to just contributing to a company pension fund.” Sher says the digital solution called the Contribution Optimiser allows employees to set their income goals, while also showing them how to meet those goals. “One fascinating feature is a single tap on the app to close their retirement gap. The app then sets up a personalised contribution plan that increases an employee’s contributions only when they have a salary increase, so they never experience a cut in take-home pay,” he adds. “One or two percent will be taken only when their salary is increasing so employees don’t feel that their salary is going down – they never feel like they’re contributing more – but it will totally change their retirement outcome.”
Craig Sher, Head: R&D, Discovery Invest
