One of South Africa's largest employers recently offered its employees the option of remaining in a defined benefit fund (where the end-results are guaranteed) or moving to a defined contribution fund where the benefit will be paid as a lump sum.
Out of 4 000 employees only about five percent elected to stay with the defined benefit fund. The rest have all opted for the cash-payout fund.
I find this rather startling as I would have thought that most people would have preferred to remain in the existing pension fund.
No doubt the "sweetener" the company offered, in the form of a 30 percent enhancement of fund values, made the offer very attractive.
Once again, one has to raise the concern about whether employees have enough knowledge and skills to handle their own investments when they retire, especially as reports of people getting caught up in get-rich-quick pyramid schemes continue to stream in.
Many people who have converted from defined benefit pension funds to defined contribution funds are sitting on a time-bomb that will only explode years from now.
Changing to a defined contribution fund shifts the responsibility of managing the individual's financial affairs after retirement from the company to the individual.
My question is: do most people have the knowledge and the discipline to handle their financial affairs during retirement? I fear not.
What many people overlook is that with the traditional defined benefit pension fund, the benefits are defined and are guaranteed for life. Any actuarial shortfall in the pension fund must be made good by the company, even to the detriment of company profits.
This happened to companies like Ford and General Motors about two years ago. They had to take massive write-offs against company profits as a result of looming shortfalls in their pension funds.
Companies in South Africa will no doubt deny this, but the similar profit write-offs are behind their eagerness to persuade employers to move from the defined benefit retirement funds to defined contribution funds.
What is often not spelt out is the fact that with a defined contribution fund the company liability ends with the hand over of that seemingly large cheque at retirement.
Often a large carrot in the form of a bonus is dangled before the totally confused employees as inducement to choose the defined contribution option.
I seriously question the ability of most people to handle their finances at an age when they will be most vulnerable. For the first time in their lives people have what seems to be a large sum of money to invest, yet in many cases they will lack the investment acumen to make the right decisions. I see it all the time people with small amounts of money panic every time the stock market goes into reverse.
Imagine these panicky investors being in charge of their own, and in many cases, their only money.
Apart from making the wrong decisions there is also a strong possibility of people falling victim to all kinds of investment scams.
Thirdly, I have come across some people who take the defined contribution route to get cash and, for example, buy a farm for their son and then, pleading poverty, apply for a state pension.
If companies continue to persuade their employees to move from a traditional pension fund to contribution-based funds, at least they should introduce some kind of financial training for people as they approach retirement.
My experience with most people is that they over estimate the amount of money they will have and under estimate how much they are likely to need for the rest of their lives.