Issue: June - Aug 2013
RETIREES NEED MORE SUPPORT FROM TRUSTEES AT RETIREMENT
Where particular stakeholders of retirement funds are morally and legally obligated to act in the best interests of the members, they generally do so. However, Old Mutual research has shown that members often make uninformed decisions upon retirement. This has raised the question of how trustees and other stakeholders can better assist and support members at retirement.
Michelle du Toit, head of OMAC Actuaries & Consultants, points out that choosing how to retire is as important as saving for retirement. It is therefore crucial to help with the education of members in the few years before retirement as well as on retirement. These are the most vulnerable periods for members to make decisions on retirement investments.
Lack of member education
Many members may not educate themselves sufficiently, so it is up to us to ensure that they have enough information to make informed choices. We put great effort into getting our funds aligned with the needs of our members. We should ensure that the members we look after while active in our funds are given the correct advice upon retirement,” she believes.
This assistance should include help for members in making the right choices and selecting suitable providers, she adds: “A critical question we’re exploring is whether trustees/sponsors should select a default provider/adviser for members.”
Matter of trust
Members often rely on their fund’s trustees to make the best decisions for them. It means there is a moral obligation to assist them on retirement. “Members remain highly trusting of their trustees and are mostly confident of their abilities and willingness to act in their best interests. This is in spite of the fact that members are typically disengaged from their trustees and the process through which they are selected,” says Du Toit. She points to the results of the 2012 Old Mutual Retirement Monitor. It revealed that 90% of respondents who are fund members indicated that they did not vote in their most recent trustee election.
However, Du Toit says, member awareness of their trustees does seem to be increasing. This is a possible testament to the efforts to improve communication to members so far undertaken by the industry. In the latest Old Mutual survey, 57% of respondents (up from only 35% in 2011) were able to identify their trustees either by name or by company.
Drive to change behaviour
Knowing the levels of trust that members have in trustees’ decisions, trustees should ensure that good governance drives them to ensure that members do not squander their hard-earned savings.
Trustees, and others in responsible positions, need to find ways to avoid the detrimental savings behaviour demonstrated by many members. “People tend to be reluctant to make the effort to save. Even those who are motivated to save often succumb to emotion and make.
Du Toit . . . help available
rash decisions that undermine their savings goals,”
The shift from defined-benefit to defined-contribution funds has placed the burden of responsibility for retirement savings on employees and fund members. But members tend to opt for the lowest contribution to their retirement fund, which again leads to lower retirement savings.
It’s important that trustees be made aware of these issues so that they can communicate with their members and advise them appropriately.
Boils down to communication
According to Du Toit, probably the toughest challenge facing trustees is to help members understand where they are currently positioned in terms of meeting their retirement goals. In order to overcome these challenges, members must have easy access to simple, comprehensive educational material. “Based on this, members can draw up achievable retirement budgets which can be regularly evaluated, and assessed against their current circumstances,” she advises.
One of the most important issues to include in member communication is a basic overview of the advantages and disadvantages of available annuities, as this will assist them in making the correct choice when purchasing an annuity. Members often choose the annuity that offers them the greatest starting return, without much consideration for the long-term consequences of that decision. “The biggest problem is that annuities confuse and intimidate members. There is also a perceived legacy of historical poor performance and poor advice, which has eroded trust and led to members not seeking proper advice,’ she says.
Annuities: what members need to know
It’s clear from the government’s discussions on retirement reform that annuities will become the preferred savings vehicle for members. So addressing members’ lack of understanding should be a priority for the industry.
“Annuities help preserve income for members. We often offer members default categories in investment portfolios and contribution rates. Default annuitisation is therefore a viable option. Members trust decisions made for them by trustees/sponsors, so it makes sense to leverage that trust by assisting members to make more informed choices at retirement,” Du Toit argues.