New regulations signify next step in retirement industry reform

Sara Herbert, head of investment consulting at Old Mutual Corporate Consultants

Sara Herbert, head of investment consulting at Old Mutual Corporate Consultants

A noteworthy stride in government’s reformation of the retirement fund industry was taken on August 25 2017, which saw the implementation of the final retirement funds default regulations on September 1 2017.

However, existing funds have until March 1 2019 to comply.

Sara Herbert, head of investment consulting at Old Mutual Corporate Consultants, agrees that the regulations are another step towards achieving the objective of retirement fund reform — to improve the retirement outcomes of retirement fund members.

She says pensioners are flooded with choices before and at retirement, but many are ill-prepared to make informed decisions. These defaults regulations are aimed at helping members make the right decision by implementing appropriate automatic choices for retirement fund members who don’t want to or fail to make their own selection.

Herbert says Old Mutual’s research supports the need for such retirement reforms.

“Our 2017 Old Mutual Corporate Retirement Monitor showed that 61% of retirement fund members actively chose the default portfolio as they did not feel confident about making an alternative choice, or they trusted it was appropriate. Even when member choice was provided within funds, only 8% changed their investment choice in the last three years.

“This demonstrates the significant impact default and pension decisions have on members’ ultimate retirement benefits. It is therefore important for trustees to make such default decisions with care and consideration.”

The new regulations require all retirement funds to adopt a set of default options for fund members in terms of investments, preservation and pensions at retirement.

“Historically defaults have been focused on investment choices, but this legislation expands the application of defaults into the area of preservation. The pensions at retirement component of the default regulations are not defaults per se, but rather trustee endorsed annuities that retiring members will need to opt into,” says Herbert.

“The regulations also offer guidance to fund trustees on their roles and responsibilities regarding these default selections. These responsibilities include ensuring they are easy to access, and providing counselling to guide members’ decisions.

“If correctly implemented, these regulations should help improve the retirement outcomes of many members by ensuring that their funds’ defaults are appropriate, competitive and well communicated to members,” adds Herbert.

The National Treasury summarises the provisions in the regulations as follows:

  • Default investment portfolio — all retirement funds with a defined contribution category are required to have a default investment portfolio. The investment portfolio that members are defaulted into should be appropriate, reasonably priced, well communicated to members, and offer good value for money. Trustees are required to monitor investment portfolios regularly to ensure continued compliance with these principles and rules. Performance fees will be allowed but subject to a standard to be issued by the Financial Services Board and a regulatory or policy review. Loyalty bonuses are not permitted. The default investment portfolio regulation, for now, does not apply to retirement annuity and preservation funds.
  • Default preservation — funds that have members enrolled into them as a condition of employment (i.e. pension and provident funds) will have to change their rules to allow for default preservation, as some of them do not allow resigning workers to leave their accumulated retirement savings in the fund. The employee, however, will have the right and option to withdraw, upon request, the accumulated savings or to transfer them to any other fund, thereby achieving portability. Employees will also be required to first seek retirement benefits counselling before they make a decision. The default preservation regulation does not apply to retirement annuity and preservation funds.
  • Annuity strategy — two types of annuities exist, a living and life annuity. A life annuity, once chosen or defaulted into, becomes irreversible. To better manage this irreversibility, it was decided that funds should first require the active participation of members, who should indicate beforehand which type of annuity (for example, life or living annuity) should be paid. This required pre-selection by the members makes the purchase of an annuity a “soft default” by having the member “opt in” instead of “opting out” — members must first indicate which annuity product they would prefer being enrolled into. The “default” annuity should also be appropriate for members, well communicated and offer good value for money. Members should be given access to retirement benefits counselling to assist them in understanding and giving effect to the annuity strategy. Pension fund, pension preservation fund and retirement annuity funds are required to establish an annuity strategy. Provident and provident preservation funds must only establish an annuity strategy if the fund enables the member to elect an annuity. This does not mean that members of provident funds are compelled by these regulations to purchase an annuity upon retirement; the annuitisation of provident funds remains under discussion at the National Economic Development and Labour Council.