The default regulations to the Pension Funds Act, which are effective from March 1 2019, aim to improve the manner in which South Africa’s retirement funds assist members to both save and preserve their retirement savings, which is vital given that that most South Africans are not in a position to maintain their standard of living when they retire, according to Wayne Hiller van Rensburg, Institute of Retirement Funds Africa (IRFA) president.
He says the default regulations also intend to simplify solutions for retirement fund members, whether they are still saving for retirement; resigning from an employer; or deciding what to do with their savings at retirement.
Furthermore, the default regulations intend to improve communication between funds and members and ensure that members have access to counselling.
“A default is where automatic choices are made for members of retirement funds, because they do not want to make a choice or they fail to make a choice,” explains Hiller van Rensburg. He says funds have recognised that members need guidance when making decisions related to their benefits.
For this reason many funds have already developed: default investment strategies assisting members with their investment choices; default preservation options for those members who terminate employment before retirement, which allows for continued membership with no additional contributions; and a few funds have also identified annuity/pension strategies with preferential fees and guidance on the type of pension a retiring member may want to consider.
The need for guidance is now a law. “Good benefit design recognises that members of retirement funds need a fund that will assist them with making the best possible choices from cradle to grave,” says Hiller van Rensburg.
“Up until now it has not been the law, but all of this changed with the default regulations to the Pension Funds Act. Now, all retirement funds need to have a default investment portfolio strategy, a default preservation strategy and a preferred annuity strategy, which impacts on three aspects of investors’ retirement journey, namely when they accumulating retirement savings; the preservation and portability of their savings; and an upon retirement.
“Firstly, retirement funds are required to provide a default investment strategy for retirement fund members who are unsure which of their investment options to implement. Trustees need to ensure that the default investment portfolios are appropriate for the members automatically enrolled into them, and that this default is clearly communicated to members. Members must be able to opt out of this option.”
Hiller Van Rensburg says the second aspect of the default regulations is default preservation, which ensures that funds must make provision for members to become paid-up when changing jobs, on resignation or retrenchment.
“From March 1 retirement funds are required to have a default preservation fund option, which means that if a person leaves their employer and is unsure what to do with their retirement pension savings, the fund must have a default preservation option in which the member’s savings can be placed.
“This option is required to be appropriate for the type of members in the fund. Paid-up members must not pay higher fees than active members in respect of investments. Administration fees need to be reasonable in relation to the service required by a paid-up member, and no initial fees may be charged when a member becomes paid-up.
“Furthermore, new members of the fund must be allowed to transfer benefits from other funds. When a member elects to transfer benefits into the fund, the fund must arrange for these transfers at no additional cost,” says Hiller Van Rensburg.
The third prerequisite of the draft regulations is for funds to have a default annuity strategy for members on the point of retiring.
While funds have a wide choice in structuring their preferred annuity strategy with both in-fund and out of fund options being allowed as well as living or life annuities, Hiller van Rensburg says funds are required to have an option that is appropriate for most members of the scheme, and the fund should negotiate the best possible rates on behalf of its members.
Retirement benefit counselling is another important aspect of the default regulations. Hiller van Rensburg says retirement benefits counselling is defined as the disclosure and explanation, in clear and understandable language — including risks, costs and charges of:
This will mean more member communication and in particular face-to-face member engagement to ensure that the information is properly understood and communicated.
Hiller van Rensburg emphasises that while the counselling is not financial advice, it is a service that can help retirement fund members make better retirement choices.
He contends that the default regulations extend the obligations and influence of retirement funds from employed members into their retirement, which has the potential to significantly improve the overall benefits enjoyed by members — but it will extend the responsibilities and administrative burden of retirement funds and their trustees.
“While the changes are to the benefit of members in that better choices are the most likely outcome of the new regulations, they require additional work that will come at a cost.
“The important thing for all funds to do here is to balance the cost of providing and complying with the new requirements and against the net investment being made for members,” says Hiller van Rensburg.
He explains that administration costs will increase due to additional requirements on funds to provide more services and to pay for the infrastructure that will have to be built and maintained.
More member communication as well as tools to monitor the delivery and effectiveness of the messages will have to be developed. This too will add to the costs.
However, Hiller Van Rensburg believes the default regulations are a step in the right direction to encourage saving towards a sustainable retirement and will also improve retirement funds’ member engagement.