Revised retirement regulations should provide improved outcomes for retirees

The National Treasury has moved closer to its goal of ensuring that South Africans can retire more comfortably following the release of its revised default regulations for the pension industry.

This is the opinion of Jill Larkan, Corporate Liaison Executive at financial advisory business GTC.

“These revised regulations follow extensive consultation with the retirement industry after the first draft of default regulations from National Treasury were published in 2015,” says Larkan. “The Treasury has clearly taken the concerns and input from the industry on board and the latest revisions are generally much less restrictive on the providers of retirement benefits, while still protecting fund members.”

The aim of the regulations is to lower charges and improve market conduct in the retirement fund industry, to ultimately enhance retirement values by limiting costs and allowing more South Africans to retire comfortably.

“The Treasury published a paper announcing changes in South African Retirement Funds to this effect as early as 2011 and has since worked with the industry to develop rules which would improve retirement outcomes for more people while simultaneously reducing the pension burden on the state. This is in line with global developments towards a more transparent and lower-cost savings environment,” says Larkan.

The changes have been concentrated in three main areas, namely default investment portfolios, default preservation and annuity strategies.

The regulations stipulate that all defined contribution retirement funds should provide for a default investment portfolio into which all members’ contributions are automatically placed, unless they specify, in writing, an approved alternate portfolio.

“These default portfolios will come under much greater scrutiny, as the boards of retirement funds will be required to demonstrate, to members and the Registrar, that the default options are in the best interest of members enrolled in them and careful consideration has been given to, amongst other things, the design, composition, fees, performance, disclosure and review of the selected portfolio.

“In line with the global focus on lowering costs, all fees and charges will have to be disclosed in clear and understandable language; no loyalty bonuses or other complex fee structures to asset managers will be allowed; and funds must equally consider active and passive investment strategies in the establishment of a default portfolio,” explains Larkan.

She notes a relaxation in stipulations regarding the allowance of performance fees in the revised regulations, which will be required to comply with an industry standard. This also confirms that these incentivise asset managers to produce desired results.

“The first draft of regulations called for a complete restriction on investment strategies charging performance fees, but this has been removed, as this would have excluded alternative assets classes that can reduce risk and enhance long term returns. The intention of the initial rule was to prevent members from being overcharged for underperformance of investment strategies, but we believe this goal will be achieved with a greater emphasis on communication.”

Larkan explains that, in addition to disclosing all fees and charges to members, funds will henceforth also be required to make known the impact of fees and charges on the fund, as well as provide details on the composition and performance of the portfolio, net of fees.

“All of this is aimed at equipping the retiree with more information in order to hold their fund trustees accountable and improve outcomes,” she says.

The regulations also address rules pertaining to default preservation options – one of the ways in which the government is aiming to have more retirees be self-funded and not dependent on the government, says Larkan.

“Fund rules must allow for a ‘paid-up’ option for members, meaning a member will be able to preserve their pension pot inside the fund once a person resigns,” she says. “This ‘paid-up’ preservation will become the default option, i.e. a member has to explicitly notify the fund, in writing, that he/she wishes to exit the fund and transfer/withdraw their assets.”

The retirement funds will also be required to issue paid-up certificates within three months of exit.

Larkan adds that another key change stipulates that ‘paid-up’ members are not to be charged higher administrative and management fees than active members, and no initial charges may be levied when a member becomes ‘paid-up’. This eliminates exorbitant “initial charges” levied when external preservation funds are purchased.

“This provides additional incentive for members to preserve and compound their existing savings pots,” says Larkan. “Similarly, the regulations also aim to make the transfer from one retirement fund to another as easy as possible, by disallowing levies to be charged in such circumstances and so preventing ‘leaking’ of the accumulated retirement benefit.”

Larkan is encouraged by the regulations’ efforts to impart knowledge upon savers and retirees through the provision of ’counselling’, where disclosure and explanation, in ’clear and understandable language’ must be given on portfolio’s, annuities, preservation etc. This should either assist members in their decision making, or encourage them to seek a Professional Adviser to address any further concerns.

Regulations for default annuity strategies have also been amended following concerns from the industry.

“The biggest change in this instance is that default annuity strategies have been changed to be ‘opt-in’ – i.e. the member needs to expressly choose to be invested in the annuity – rather than ‘opt-out’, where the member is automatically placed in the strategy. This is due to the fact that some annuity strategies, such as life annuities, would not allow members to ‘opt-out’ once enrolled,” she explains.

The revised regulations also allow for both in-fund and out-of-fund annuities to be part of the strategy, as determined by the board, allowing annuities to be purchased from 3rd party providers.

“The onus is once again on the pension fund board to ensure that the proposed annuity is suitable for members enrolled, considering the level of income payable, investment, inflation and other risks,” says Larkan.

More importantly members must be given retirement benefits counselling at least three months before the normal retirement date.

She concludes that the regulations will result in significant changes to the way the retirement funds have been operating, but emphasises that this is for the ultimate benefit of retirees.

“These changes form part of National Treasury’s retirement reform programme and we believe it will bring South Africa one step closer to having better retirement outcomes for its fund members.”

For more information contact:
Jill Larkan
Corporate Liaison Executive
GTC
M +27 (0)83 453 3344
jlarkan@gtc.co.za

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