To help us understand the potential impact of the above mentioned theory in the retirement space, Blue Chip spoke to Head of Research and Development at Discovery Invest, Craig Sher.
Shared value is the idea that when companies focus on addressing societal needs, they can become more profitable and simultaneously create value for everyone. So for example, in investing, the goal is for all the stakeholders – the individual investor, the investment provider, and society at large – to share the value that’s created when individuals do what is best for themselves.
You’d start with identifying a relevant societal challenge. In Discovery Invest’s case, we looked at South Africa’s bleak retirement statistics and asked ourselves what we could do to improve them. The National Treasury reports that only 6% of South Africans have enough saved for retirement. The key insight we have found is that, in many cases, the problem is behavioural.
Only 6% of South Africans have enough saved for retirement.
The retirement challenge boils down to three main savings behaviours: people start saving too late, they don’t save enough, and in retirement, they often withdraw too much without anticipating how long the money needs to last. This is further exacerbated by the fact that people are living longer, and so their retirement savings need to last longer.
When Discovery focused on how to improve these specific behaviours, we found that if clients did what was in their best interests, we made more profit. Clients did better because they had better retirement outcomes and our business did better because we earned fees for longer and on higher fund balances. All of this is also extremely positive for society at large.
Undoing ingrained habits is notoriously difficult. How do you convince people to change the way they act?
We do it with benefits and rewards that almost feel “too good to be true”. For example, we offer upfront investment boosts of up to 20% for money that is saved.
The earlier one starts, the bigger the boost, but the key is that people have to remain invested to retirement to keep the boost, which encourages them to stay the course. On top of this, people can get even higher boosts for adding additional amounts each year. When people reach retirement, we give up to 50% extra income when people withdraw their money responsibly, and stay healthy.
These benefits encourage the right investment behaviours from clients as they end up doing the right thing in order to maximise their boosts and rewards. Importantly, we don’t cover the costs of these boosts through any extra loadings or fees within the product; they are possible only if – and because – our clients change the way they behave towards retirement savings.
The million-dollar question: Is shared value just another global trend, or does it actually work?
It works. And once you see it in action, there’s no going back. Since 2015, when we started our shared-value approach to investing, we’ve tracked and seen the following:
- On average, Discovery Invest clients invest three years longer, and over 120% more in additional contributions, after introducing behavioural incentives. Our analysis shows that small behaviour changes like these can double retirement outcomes.
- Our clients are also more likely to stay invested. A statistical analysis on our retirement clients shows that our boost is the biggest predictor of a client staying on track for retirement, with our average lapse rate being 28% lower than expected rates.
So if you let the numbers speak, they say it loud and clear: Discovery’s shared-value approach really does have the power to transform South Africa’s retirement landscape.