Retirement journey becoming less complex

Jaco van Tonder

Jaco van Tonder

The default regulations to the Pension Funds Act are government’s response to a longstanding series of discussions and debates around whether the retirement fund policy framework in South Africa is serving the needs of retirement fund members, according to Jaco van Tonder, advisor services director at Investec Asset Management.

He explains that a number of weaknesses were identified in the existing retirement fund regulatory framework that the policymaker is trying to resolve and which the default regulations are a product of.

“One area of particular concern was for retirement funds to restructure the way they contracted services from service providers to ensure members profited from the benefits of scale and institutional pricing,” says Van Tonder.

“The draft regulations are a component of National Treasury’s aim to realise more economical solutions for retirement fund members and pensioners.

“The default regulations also try and simplify solutions so retirement fund members are not left having to choose from a bewildering array of different options, whether it is: which fund to pick if they are still saving for retirement; what to do with their savings when resigning from an employer; or what to do with their accumulated savings at retirement.

“Previously, retirement fund members were pretty much left to themselves to figure out what do, unless they contracted the services of a financial advisor. The regulator, however, felt this was not enough and that members had to have more help.

“The default regulations are an attempt to define what the ‘more’ is that retirement funds are expected to do for their members,” explains Van Tonder.

He says the first thing that all retirement funds are required to provide from March 1 2019 is a default investment strategy for retirement fund members who are unsure which investment option to exercise.

“The default regulations require trustees of a retirement fund to have a default investment portfolio option that is designed to be cost-effective, suitable for fund members, and in which members who are unsure of where to invest, will be automatically invested,” says Van Tonder.

“While this measure is not entirely new, as many funds in South Africa already have a default investment portfolio option, it is a good measure to ensure that all funds have such an option.

“The second weakness that the default regulations attempt to overcome is what happens when a retirement fund member leaves an employer and they terminate their membership of the retirement fund.

“Previously many people in South Africa simply withdrew their retirement savings without putting it in a preservation fund, and the few that did put it in a preservation fund had to buy one in the open market on their own, or speak to a financial advisor.

“From March 1 retirement funds are required to have a default preservation fund option that they contract from a service provider, negotiate the fees at institutional charging rates, and even arrange for some continuation of the investment option that the member was in when they were invested with the fund.

“This means that if a person leaves their employer and is unsure what to do with their accumulated pension fund assets, the fund is obliged to have a default preservation option in which the members’ savings can be placed, in the knowledge that it is a value-for-money option and appropriate for the type of members in the fund.”

Van Tonder says the third prerequisite of the draft regulations is for funds to have a default annuity strategy to help members on the point of retiring structure their retirement.

“Funds are required to have a contract with at least one provider for a type of pension annuity that will be appropriate for most members of the scheme, given their demographic profile and level of savings. The fund should also negotiate the best possible rates on behalf of its members.

“The fourth and final change that is being implemented by the default regulations is the golden thread that ties the first three changes (default investment, default preservation, and default annuity) together.

“A fund is required to offer retirement benefit counselling, which should be available to explain to members what their options are; whether they are choosing an investment option, picking a default preservation option, or have reached the point of retirement and are considering buying into the default annuity strategy.”

Van Tonder emphasises that the counselling is not financial advice. For example, the counsellor will not explain what the tax consequences of a particular investment, preservation or annuity strategy are going to be.

“The counselling service will not be required to do advanced cash-flow modelling to help a member or pensioner understand how long various options will last or the tax implications at retirement.

“Nevertheless, the counselling service is a tool that can help people make better retirement choices, given their age and how long they still have left to retirement,” says Van Tonder.

However, he contends that given how complex retirement is from tax and cash-flow perspectives, consulting with a quality financial advisor will still add significant value to the process.

Van Tonder believes the default regulations will bring more structure into what is expected of retirement funds in terms of their member engagement.

“The default regulations take important steps towards providing more safety and control for retirement fund members and pensioners, who up until now have had to make critical decisions around their life finances without much support from their retirement fund.

“We are hopeful that the default regulations will see more people actively engaging in conversations that will improve their financial knowledge, particularly with regards to whether they are financially prepared for retirement,” says Van Tonder.