Corospondent October 2017 - October 2017
Retirement Default Regulations - October 2017
The new retirement default regulations, which took effect on 1 September, herald a new chapter for SA savers.
Many years and a great deal of consultation later, the regulations are a serious attempt to improve the level of savings by South Africans and help pension fund members make better decisions that ultimately allow them to retire comfortably. At present, it is estimated that less than 30% of individuals have enough when they retire – the new regulations aim to change this for the better. Although the interventions are rigorous, we believe they present a great combination that still allows retirement savers to retain the necessary flexibility to achieve the best possible outcomes.
In short, the new regulations introduce the following changes:
- Employer pension and provident funds are required to offer a default in-fund preservation arrangement to members who leave the company. This is a significant change from the current arrangement which forces departing employees to move their accumulated savings from these funds. Importantly, any funds remaining need to be invested in the trustees’ default solutions (in line with active members) and at the same costs. Departing employees can still withdraw their savings or transfer them to any other fund, but remain fund members until they elect another option. Trustees are obliged to offer employees counselling on retirement benefits before they make a decision. This focus on financial education and advice is a significant move.
We believe this offers a great way to plug the large leakage in the SA retirement market, and will assist individuals to save for when they will need it most.
- In defined contribution funds, trustees are required to offer a default investment portfolio to members who have not made any choice on how their savings should be invested. The investment portfolio should be “appropriate, reasonably priced, well communicated to members and offer good value for money”.
This principle-based approach to selecting default investment products is appropriate, particularly in a market like SA. Investment portfolios need to be suitable, given the concentrated nature of the local markets, and carefully balanced against risks to deliver the best possible investment outcome. Cost cannot be the only consideration. Trustees need to consider long-term, after-fees investment outcomes to ensure the best options for their members. Most retirement savings in SA are defined contribution in nature. This means that individuals ultimately bear the risk and responsibility of ensuring they have enough to last through retirement.
As people are living longer (and therefore need more in the savings pot to afford retirement), and with more muted returns expected from asset classes over the next few decades, ensuring a solution that can meet requirements is paramount. The biggest risk here is not being able to afford to retire – essentially individuals cannot rely on low-risk asset classes or merely beta to generate the necessary outcome.
Performance fees are often cast as some sort of dark art, but if aligned with the investment value created, and if simple to understand, these fees are a powerful force for good in retirement savings. Coronation only charges performance fees when we deliver significant outperformance, and all our performance fee structures are capped and clearcut. Accordingly, we welcome plans to formulate a new standard for performance fees (confirmed in the new regulations), which aims to simplify the methodology and improve disclosure of these fees. We believe that this can be a powerful mechanism that allows retirement savers to benefit from the much-needed uplift in savings returns while only paying when performance is delivered.
- For retiring members, a fund is required to offer an annuity strategy, either in-fund or out-of-fund. Members cannot be automatically defaulted into a specific annuity option, but has to consent first.
This is an important development, and provides retirees with a broad pathway to assuring a sustainable income for retirement. It also ensures that individuals are provided with adequate advice when making retirement decisions. We believe that this goes a long way to ensuring individuals make the most of what they have saved and make a decision that is right for their specific circumstances.
Given the concerning state of savings in SA, more can be done to encourage and preserve retirement savings. In truth, many funds already comply with most of the new regulations and we find that most trustees really apply their minds when considering investment options.
Still, we believe that the new measures are an important step forward to ensure that more South Africans can afford to retire comfortably.