PPS announced changes to its PPS retirement annuity fund after the board of trustees realised that if it did not offer members more flexibility and options, members would continue to leave.
This move by PPS to provide members with the option of switching to a new generation retirement annuity fund shows the importance of member education. As members of retirement funds become more aware of the product offerings in the market they start to vote with their feet.
Several years ago as a result of investigations by the Pensions Fund Adjudicator (PFA), issues were raised about the inflexibility and high costs of what we now call “old generation” retirement products, which are invested in endowment-type policies with life companies. These products offered very little flexibility and if you wished to lower or stop your premiums, hefty penalties, or value reductions, applied as assumed costs for the full period of the investment where deducted upfront. Commissions to brokers made up a significant portion of these costs.
The PFA introduced a cap on penalty fees and insisted that retirement funds allow members to transfer their assets to other retirement funds. As a result, many members started to migrate to lower-cost new-generation products whose underlying investments were in unit trust portfolios and which had no penalties. Advocate Thinus Ferreira, principle officer of the PPS retirement annuity fund, says members were taking advantage of these changes and moving out of the PPS fund, which was launched in 1961 based on old-generation structures.
As none of the trustees of the fund worked for the life company who held the policy on behalf of members, they simply looked at how best to meet their members’ needs. As a result PPS now offers both the old-generation and new-generation option within the same fund so members who want to make the change do not have to apply for a Section 14 transfer, which can take up to six months. The average processing time within the fund is just 20 days.
The reason the fund continues to offer both options is that it does not always make financial sense to switch RAs if the reduction in value of cashing in the old-generation product exceeds the cost saving of the new product. The “old generation” RA was structured as a policy with a life company; the life company (not PPS) will charge a penalty for early surrender to recoup costs.
PPS has provided a calculator to assist members in deciding whether the switch makes financial sense. In the case where it does not, members can still start a second “new generation” RA within the fund if they wish to increase their RA contributions or add in annual lump sums.
New members to the fund can choose between the two products, although Ferreira admits that it would not make sense for someone to select the old product when the new product provides more flexibility at lower cost.
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