It is common knowledge that South Africa is facing a retirement crisis with most employed South Africans having insufficient funds to support themselves in their old age.
National Treasury has introduced changes to the Pension Funds Act which it hopes will make it easier for individuals to make the correct choices about their retirement benefits and lower the costs associated both with products and advice. All retirement funds will have to have implemented these changes by March 1 2019.
In a nutshell, these changes will provide members with a default retirement investment portfolio and provide a default preservation option, as well as an annuity strategy on retirement (see sidebar). Key to all of this is that members will have to receive retirement benefits counselling before withdrawing funds either due to resignation or retirement.
What the changes essentially mean is that employees will not have to go into the retail market space and find an adviser to get retirement advice. This has been one of the major challenges in the industry and as David Gluckman of Sanlam Employee Benefits explains, “there is a large section of fund members who will not receive financial advice because they do not have enough accumulated to be of economic interest to financial advisers”.
Currently, this means that an individual who wants to preserve their retirement benefit when changing jobs, or an individual needing advice when retiring from a fund, may find it difficult to get advice in the retail market. Even if they do, the costs are high and eat into their relatively small retirement benefit. So, it is not surprising that, when given the option of investing or taking the cash, many members choose to just take the cash even if they know it is not the right financial decision.
Once the changes are implemented and members have appropriate default options and in-house advice, theoretically they should find it easier to make the right choices. As Gluckman says “retirement benefits counselling, if implemented in the spirit of the legislation, provides the most practical means to fill that gap and empowers such fund members to make better financial decisions. Done properly, it complements financial advice by addressing a critical gap.”
An online survey conducted by Sanlam asked trustees and principal officers whether or not these regulations would have a material impact on their members. More than half of respondents believed the regulations would be extremely effective or very effective in improving retirement outcomes, nearly 70% believed there would be a large increase in preservation and nearly 40% believed charges in annuities on retirement would decrease.
However, a separate survey by Sanlam of professional employee benefit consultants (those firms that advise trustees and principle officers) had a different perspective. They believe that the outcome will depend on how well retirement benefits counselling is implemented and many believe that retirement funds will only concern themselves with doing the bare minimum to comply.
These professionals are probably correct in their scepticism as any benefit comes with a price tag which will ultimately be carried by members. However, considering the possible cost savings to members of accessing institutional products as well as the upside to those funds in higher preservation rates, there could be additional money to provide more extensive retirement counselling.
In an ideal world this counselling would include financial management, because, as long as households are facing increasing debt repayments, retirement funds will be seen as a way to plug that debt hole rather than be used for their intended purposes.
Default investment portfolios
All retirement funds must provide a default investment portfolio. This means if a member does not actively select an underlying investment portfolio they will be placed into the default option. The trustees need to ensure that the default investment is appropriate for the members and that the fees and charges are reasonable and competitive, and all fees are fully disclosed.
Most funds already offer a default investment portfolio but those may not currently meet the new requirements in terms of appropriate investments and disclosure of fees.
Default preservation and portability
Although members of employer funds can still take their retirement benefit when they resign, the fund must offer a default preservation option so that the member can leave their retirement benefit in the fund if they choose to do so.
Alternatively, the fund must allow for a transfer of the benefit to the new employer’s fund. The regulations will also require members to be given access to retirement benefits counselling before any such withdrawal benefit as determined in the fund rules is paid to them or any transfer is made to another fund.
The retirement funds must establish an annuity strategy for members on retirement. The annuities offered by the fund must be appropriate and suitable for members.
This means it must take into account the level of income that will be payable, the investment, inflation and other risks as well as income protection granted to beneficiaries. Fees and charges need to be reasonable and fully transparent. Members must also be given access to retirement benefits counselling not less than three months before their normal retirement age.
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