Discovery extends sharedvalue approach to investing

Discovery has extended its shared-value approach that revolutionised medical aid around the world to its investment products. The group is now rewarding its clients for investing longer, investing more, living well and withdrawing wisely, as people are inspired to make better choices if they see both a longterm and an immediate benefit.

Craig Sher, Discovery Invest’s Head of R&D, paints a grim picture of retirement in the country. “94% of South Africans cannot afford retirement. It’s a well-known statistic that everybody has been quoting for years,” he tells MoneyMarketing.

Only four out of ten South Africans preserve their retirement savings when switching jobs and, before age 30, it’s closer to zero in ten. “And more often than ever before, people are changing jobs – around every two or three years,” Sher adds.

In addition, savings terms have been reduced and people spend much more time in retirementthan ever before as they live longer. And when they’re in retirement, they draw down money irresponsibly, with the result that they run out of funds and become reliant on the state, or on their children.

THE RETIREMENT GAP IS BIGGER AND MORE UNCERTAIN THAN THOUGHT

“They think they have a large pot of money but what they don’t realise is that it has to last for 30 or 40 years,” Sher says. “You’d think that an initial drawdown rate of 6.6% isn’t too bad – but that may only last around 12 years.”

The retirement gap is bigger and more uncertain than thought. The number of people living beyond the age of 100 is doubling every decade. By 2050 it is estimated that there will be over two million people older than 100 worldwide and lifestyle improvements will extend longevity even further. In addition, perception is a problem as people take only average life expectancy into consideration, which is variable, and many will live longer.

“Governments around the world see longevity as major problem and some are increasing the retirement age,” Sher says.

Fees reductions

While the retirement industry focuses on fees reduction, this, says Sher, “will only get you so far”. He points out that there has been a lot of rhetoric in the market about fees, but an analysis carried out by Discovery Invest shows that cheaper fees aren’t what changes an outcome for a client. “The real impact comes in making people change the way they save – and if they save for longer, the impact dwarfs any impact that lower fees make.”

Kenny Rabson, CEO of Discovery Invest, points out that when brokers compare LISP platforms, they carry out comparisons of what the platforms’ fees are, to ascertain which platforms are cheaper than others.

“Discovery Invest is an alternative to all of that – and a LISP platform with a difference.We make sure our fees are competitive and at the end of the day if people want a generic LISP, it’s there for them. But there is a different process for advisers in terms of trying to change the outcome for their clients,” he adds.

“We need to do a lot more – and the industry and advisers need to do a lot more to give people a reasonable retirement. This is an international issue and not unique to South Africa. “The move to passive investing has helped a bit in the United States because companies went from 2% in active fees to four basis points, and that is going to make a difference over 20 years in a highly efficient market, but passive hasn’t done well in South Africa because the cost saving is not nearly that dramatic and it’s so 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.”

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 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.”

Kenny Rabson, CEO, Discovery Invest

Craig Sher, Head: R&D, Discovery