New retirement reforms set to improve proficiency

Pieter Koekemoer of Coronation Fund Managers

Pieter Koekemoer of Coronation Fund Managers

There are two main points on government’s agenda for saving sector regulation: social security (government-supplied benefits) and retirement reform (making the existing system more efficient), according to Karl Leinberger and Pieter Koekemoer of Coronation Fund Managers.

With regard to social security, they contend that the state wants to add additional government benefits: retirement income, disability and funeral policies. In the best-case scenario, this will augment the current benefits — in the worst case, it will displace some private sector activity.

“Currently, the thinking is that the existing UIF payroll tax model will be used to fund government-provided benefits. At present, employees contribute 2% of the first +R150 000 of their salary towards UIF.

“Under the proposed new model, this will be hiked to 12% of the first R150 000 in exchange for the expanded social payments. Potentially, this will mean that the first R15 000 clients use to buy financial services will go into government-managed products,” say Koekemoer and Lienberger in Coronation’s February 2017 edition of Conversations, which provides investors with an update on the latest market trends and outlooks.

They don’t believe this will be likely in the foreseeable future, primarily because it is not affordable without almost insurmountable disruption of the status quo. Also, organised labour will resist the move of private sector defined contribution retirement plans to contribute to a government fund that is not fully funded.

Pertaining to retirement reform, Koekemoer and Lienberger report that the latest draft regulations propose a number of changes to the regulations governing retirement funds:

  • Default investment options: In a departure from previous draft regulations, the new stance is completely neutral between active and passive options. It does require that the default investment option is simple, transparent, cost-cognisant, fair and defensible, but there aren’t additional restrictions to Regulation 28 for the default investment option;
  • Preservation option: The new regulations will require that trustees offer a preservation option when members leave the fund, and also that members are “nudged” to preserve savings at “accidental” early access points, with the provision of retirement benefit counselling before access to funds is allowed;
  • Retirement income strategy: The proposal is that all funds are required to offer a retirement income option, with members able to opt in or choose their own individual annuity. The income option can be in-fund or out-of-fund, and a living annuity or a guaranteed annuity. Given that it is easier to change the underlying portfolio of a life annuity, that may be the easier route for trustees. This is the only proposal that applies to retirement annuity funds.
  • Koekemoer and Lienberger contend that the new proposals will further blur the divide between institutional and retail retirement management. Partly through tax harmonisation, the retirement reform favours more standardised individualised funds over employer-specific funds. Trustees will also be required to provide counselling. Together, the new regulations could open up the occupational fund market to more participants, potentially creating opportunities for retail advisers in the corporate sector.

    Two new regulators will be introduced to oversee market conduct, according to Koekemoer and Lienberger. The first is a prudential authority as part of the South African Reserve Bank, which will manage systemic risks and institutional sustainability.

    The second will replace the Financial Services Board. The proposed new Financial Services Conduct Authority (FSCA) will oversee all types of product suppliers, administrators and advisers. The FSCA will regulate the market according to the proposed Conduct of Financial Institutions (CoFI) Act, which can be understood as a “super FAIS (Financial Advisory and Intermediary Services) Act” applicable to all players in the industry. In essence, the intent is for the regulatory approach to become more consistent regardless of the type of investment product, and it will focus on the outcomes of product value, fair disclosure, complaints handling and the balance of accountability across the whole industry.

    It is expected that the FSCA will be more proactive and decisive that the current bodies, with significantly enhanced powers (as much as the South African Constitution allows).

    “The Retail Distribution Review (RDR) focuses on a number of areas: the categorisation of advisers, investments, long-term and short-term insurance, sales execution and other intermediary services, as well as inclusion of the low-income market.

    “The first phase of the RDR is nearing completion. It focused on investments via long-term insurance products, and resulted in a proposal to lower exit penalties. Also, it included suggested updates to the FAIS Fit and Proper Requirements, which should come into effect later this year,” say Koekemoer and Lienberger.

    In terms of section 8 of the FAIS Act the registrar must after consultation with the advisory committee determine the requirements that financial services providers, key individuals and representatives of the provider must comply with.

    “Included in the updates are new requirements for competence, which require a second round of regulatory exams for all advisers and continuous professional development activities of between six to 18 hours a year.

    “Interestingly, the new regulations require automated advisers (robo-advisers) to comply with all the compliance and record-keeping obligations demanded from financial planners and additional competency requirements for key individuals of affected firms.

    “The second phase of RDR, which will take place this year, will focus on retail investment products (particularly affecting advisers with white-labelled products and/or revenue from investment management activities in addition to client-agreed advice fees) as well as the categorisation of advisers.

    “The authorities are currently proposing only two types of advisers. A registered financial agent (RFA) will own their own licence and cannot be a product supplier, although a product supplier may hold shares in the advisory. Having ties with a product supplier will include ownership relations, receiving direct or indirect revenue from a product supplier, outsourcing services to a product supplier or meeting any targets from a product supplier.

    “These relationships will not be illegal, but will attract more intensive supervision and you won’t be able to call yourself independent. An RFA will be held fully accountable for the advice given to a client.

    “A product supplier agent (PSA) can only advise on the products of their supplier, although if the group has a linked investment service provider, funds on these platforms can also be recommended. A PSA will operate as part of the product supplier’s licence and the latter is therefore fully responsible for the advice given,” say Koekemoer and Lienberger.

    They report that other aspects currently under review as part of the RDR relate to investment pricing. There has been no change in the regulator’s views on investment platforms. The RDR supports clean pricing with no rebates, and the platform should continue to collect advice fees on the adviser’s behalf, providing regulatory support for the current industry model. Commissions on investment products will continue to be phased out, but it seems likely that this will take place at a slower pace, with more exceptions allowed.

    “The authorities continue to hold a negative view on white-labelled investment products, and these products may be banned. More detailed regulation of the various types of discretionary investment management is also proposed.

    “The third phase will require enactment of the CoFI bill, which will put a new licensing regime in place, governing according to activity, not product type,” say Koekemoer and Lienberger.