Comment on retirement reform
By Kobus Hanekom, Simeka Consultants & Actuaries
Comment on retirement reform: Regulations on default preservation, investment and annuitisation
Although current legislation gives boards of retirement funds substantial fiduciary responsibility to protect the interests of their members, many fund boards appear to be falling short of the mark. The Minister of Finance therefore put in place draft regulations to remedy excessively complex, expensive or inappropriate default investment portfolios, lack of initiatives to facilitate preservation and portability of retirement savings between funds, and neglect on the part of many defined contribution (DC) funds to ensure that their members are able to convert accumulated fund credits into an income when they retire in a transparent and cost-effective way.
Draft regulations at a glance
Original draft regulations were circulated for comment on 22 July 2014. These require all retirement funds to operate a set of default policies that are in the long-term interests of retirement fund members, rather than of service providers. The regulations introduce a number of new definitions including a “default annuity strategy”, “default investment portfolio”, “retirement benefits counsellor” and “retirement funding contributions”.
The default policies include:
- Default investment strategy: All defined contribution retirement funds must have in place a simple, cost-effective and transparent default investment strategy into which the retirement savings of members who do not make any investment choices should be invested.
- Default annuity strategy: All defined contribution retirement funds will be required to have a default annuity strategy in place.
- Default preservation strategy: All retirement funds into which members are enrolled as a condition of employment (pension and provident funds) are required to have a default preservation strategy.
These market regulations will come into effect on a date still to be determined by the Minister of Finance and are open for public consultation until 30 September 2015. The proposals form part of the broader retirement and savings reforms initiated in 2011, outlined in the 2014 Budget update on retirement reforms.
1. Default investment strategy
All defined contribution retirement funds (including retirement annuity funds), must have a simple, cost-effective and transparent default investment strategy in place. Default options are automatic choices made on behalf of members who do not exercise their investment choices when it comes to investing for their retirement savings. Guaranteed type portfolios will not qualify if the guarantee only applies in benefit events and not to all situations, such as an investment switch by the member or the fund.
Trustees need to ensure that the overall objective, composition and performance of the default investment portfolios are appropriate for and properly communicated to members. Consideration must be given to a number of factors, including the goals and objectives of the members, underlying asset allocation, as well as the risk and returns members are exposed to. Fees and charges need to be reasonable, competitive and regularly disclosed.
Defaults must be simple: performance fees, loyalty bonuses or similar charge structures are not allowed. Members may not be locked in and should be able to transfer from one portfolio to another. Default investment strategies may not contain any insurance element and payouts cannot depend in any way on the reason for a member’s exit (a disqualifying requirement for guaranteed investment portfolios). Trustees are obliged to consider passive or enhanced passive investments as part (or all of) the default investment portfolio.
2. Default annuity strategy
Various products can form part of the default annuity strategy. For example, in-fund guaranteed pensions, in-fund living annuities, in-fund with-profits pensions, and certain out-of-fund life annuities guaranteed by a life office are all allowed. Trustees may also mix different products as part of the strategy. Members will, however, be able to select other annuity products. With-profit annuities will not qualify due to the structural conflicts of interest between annuitants and shareholders.
The default annuity strategy must offer good value for money, be well communicated to members, offer full disclosure on fees and charges, and be reviewed regularly to ensure compliance with the regulation. Funds must make retirement benefit counselors available to members at least 3 months prior to their retirement to help them understand how the default annuity works.
3. Default preservation strategy
It is compulsory for all retirement funds into which members are enrolled as a condition of employment (pension and provident funds) to have a default preservation strategy in place. The ultimate aim of this is to help ensure that members’ retirement savings will follow them automatically from job to job as they change employers throughout their careers.
3.1 Paid up members
Retirement funds must make provision for ‘paid-up members’ – that is, members who are no longer employed by the sponsoring employer and therefore no longer actively contributing to the fund. These members must automatically be made ‘paid up members’ when they leave the employment of the sponsoring employer, and must be given a paid-up membership certificate, recording their interests in the fund.
3.2 Transferring retirement savings
New members must be allowed to transfer retirement savings from previous funds into the new fund. When a new member joins, within 2 months of joining the fund, the fund must ask the member for their paid-up membership certificates for all other funds / preservation funds and automatically transfer the member’s retirement savings related to these into their new fund, unless members request otherwise.
If members want to, they will still be able to withdraw their retirement savings when they leave the service of an employer. Members who want to withdraw their retirement savings should be given access to a retirement benefits counselor.
Recurring charges may not differ between active and paid-up members.