Default regulations aim to improve retirement outcomes

Retirement funds are racing to comply with the Default Regulations. All funds that were registered before March 1 2018 have until 1 March 1 2019 to comply with the Default Regulations.

The Default Regulations will benefit members of retirement funds as the regulations aim to improve the level of savings by South Africans and allow members to retire securely, according to Andrew Davison, head of advice at Old Mutual Corporate Consultants.

Davison points out that most South Africans are not in a position, when they retire, to maintain the standard of living they were used to as an employee.

He explains that the Default Regulations require the boards of trustees of retirement funds to offer: a default investment portfolio in defined contribution funds; employer pension and provident funds are required to offer a default in-fund preservation of benefits; and both pension and provident funds (with the exception of a few whose rules allow only a lump sum at retirement) must offer either an in-fund or out-of-fund default annuity strategy for retiring members.

“The Default Regulations extend the influence of retirement funds from just when people are employed to beyond their employment date, and also into their retirement. This has the potential to significantly improve the overall benefits enjoyed by members, and it will extend the responsibilities of retirement funds and their trustees,” says Davison.

“This development also intends to provide adequate information and guidance to members to assist them to make sound retirement decisions whenever they leave a fund, at retrenchment or resignation, or at retirement.”

Davison says the Default Regulations are likely to have an impact on funds’ administrative responsibilities.

“If you consider the investment portfolio default, the additional administration is not too onerous. While there are some added considerations that trustees need to build into the process of developing and then assessing and monitoring their investment strategies and communicating them to members, they are not too burdensome.

“The preservation of benefits is a little more complex as the time period of a member belonging to the fund is extended, and funds’ administration systems are going to have to cater for another category of members — those who don’t pay contributions as they are paid-up and who may not be as easily contactable as current employees — which may incur an extra administrative burden.

“From an annuity perspective there is the requirement to have retirement savings counsellors to provide members with information regarding their options when they leave the fund that will come at some cost, so funds will have to consider which type of solution they put in place.

“If they are going to do an in-fund annuity strategy then their administrative systems need to be able to cater for the fact that the member moves from being someone who pays a monthly contribution into the fund to someone who is withdrawing a monthly pension out of the fund.

“There are also other administrative tasks associated with in-fund retirement annuities. For example, IRP5s need to be issued in relation to the income the fund is paying to retirees,” says Davison.

However, out-of-fund annuities don’t avoid these tasks, they just outsource them to life assurers or other service providers, which may affect the costs to members. There are important considerations for trustees and it’s crucial for them to apply their minds carefully.

Davsion believes the Default Regulations are a positive development to help South Africans retire comfortably: “Although it will take some years for the Default Regulations to have a measurable effect on the retirement sector, there is huge potential for value to be added to the pension outcomes retirement fund members.

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