Issue: September/November 09
Play By The Spirit Of The Game
It will be much more effective than loading the retirement system with new laws, argues Stanlib head of institutional design Rowan Burger.
Burger...better way for better outcome
There is a great insight into the difference between American and European ways of doing business by comparing their national sports.
Lessons learnt from the way in which sport is played will hopefully improve the way trustees act as custodians of our nation’s savings. Perceived failures in SA’s current retirement system are leading government to consider the nationalisation of swathes of the system if the appropriate outcomes cannot be achieved.
The American sport of baseball seems conceptually rather simple. Most of us have a broad grasp of the principle of batters trying to avoid strikes so that they can hit home runs and sprint around the diamond between bases. It is, paradoxically, a sport with one of the thickest rulebooks. This helps explain why the playing field is populated by so many umpires.
The game of soccer is easy to understand (other than explaining the offside rule to my wife). Rarely are there contentious decisions (except for the recent habit of strikers losing their footing in the penalty box when near the ball and a defender). To a large extent, the balance of the game is self-regulated and stoppages for breaches of the law are rare.
Unfortunately, SA’s pension fund environment has become like a baseball rulebook. Admittedly, there are a number of past issues where the spirit of the game has not been followed. This has led to the need for rigid guidance.
As with sport, no regulator or referee can predict all eventualities. Grey areas will always remain. The consequence is that, with many rules, innovation is significantly stifled and great ideas are more about bending the legal framework than about improving the game for the benefit of all involved.
So it comes as no surprise that over the past decade there’s been introduced a plethora of referees (ombuds, adjudicators) and rule interpreters (lawyers) involved in what should be a simple process of guiding individuals to a comfortable retirement. Adherence to the rulebook for trustees is no more stark than when we consider their attitudes to members once they leave their care.
The recent Sanlam Employee Benefits survey showed that an alarming, but unsurprising, 86% of trustees have no further involvement with their members in retirement once they have left their fund. Similarly, an Investec survey of trustees in 2007 showed over half of funds gave members no guidance on preservation when leaving funds.
This reality is set out in an excellent paper on governance recently presented to the Actuarial Society of SA by Jonathan Mort and Mickey Lowther. Their paper focuses on trustees’ duties to members while in the fund. The trustee has no legal duty to a member once the member leaves.
What then is the consequence of there being no referee to police members after they leave the field of play? Quite simply, we see the appallingly high encashment of savings highlighted in the Alexander Forbes Member Watch series and poor annuity decisions by members when they get to retirement. It comes as no surprise that we see many pensioners destitute but for the safety net of the State Old Age Pension.
I certainly do not advocate an environment where we draw up more rules to create further oversight of members when they leave funds. If anything, this will increase governance costs and further discourage trustees from performing the fantastic (and often unapplauded) civic duty.
Members will be in a number of funds prior to retirement. The transition period, as the member leaves a fund, becomes crucial in whether or not the system provides reasonable retirement benefits.
I would like to think that, as the primary objective of the vast majority of funds is to secure retirement benefits for members, there should be a strong moral argument for trustees to ensure that the assets under their custodianship are passed on to the next board intact. The same moral responsibility surely exists that, when an individual retires, his or her accumulated savings are applied appropriately to secure a comfortable income throughout retirement.
The industry does not require more legislation. Options and personal circumstances on withdrawal are so complex that the last thing needed is further potential liability in a world that desires individual liberty for people to make their own mistakes.
We have seen government’s intention to remove provident funds. Not only does this provision add to the rulebook, and further confuse the players. It also tends to create the wrong behavior in retirement.
If anything, the rulebook should change to make encashment more difficult by requiring more forms to be filled in and perhaps even a waiting period prior to cash payment. Once players have become accustomed to a way of playing a game, it becomes difficult to stop the practice. But we could make it harder to continue undesirable practices.
The Financial Advisory & Intermediary Services Act (FAIS) does not allow trustees to give members advice unless they’re certified to do so. However, nothing prevents trustees from ensuring that they provide sufficient information and knowledge to their members to ensure the correct behavior happens to secure comfortable retirements for all South Africans touched by the retirement fund industry.
By trustees and service providers playing by the spirit of the game, rather than by having to make further law, we will hopefully achieve the right outcome.