Edition: Edition: September / November 2015


Preservation lite

Devils are in the detail. Intentions deserve support but
implementation constraints look formidable.

Here we go again. Last year, punching above its weight, Cosatu succeeded at Nedlac in getting retirement reform shelved. Echoing then general secretary Zwelinzima Vavi, its cry was for no pensions preservation without a comprehensive social-security system (TT Dec ’14- Feb ’15).

Since then, little new has been heard about the desired social-security system.

Yet National Treasury is making a renewed sortie into retirement reform.

Perhaps because of the unions’ precondition, its focus on preservation is piecemeal in that it allows critical exclusions. The concentration on lower charges and improved market conduct, rather than preservation, might just allow it to pass muster by a more factious post- Vavi union approach at Nedlac.

A read of the Treasury press release generates a warm sensation that, after innumerable false starts and protracted discussion over the past four years, the reform process is at last under way. But a read of the accompanying draft regulations, published for comment by end-September, will probably lead to yet another round of contention; if not by the unions, whose objections are ostensibly addressed, then by trustees whose burdens of administration will swell and service providers whose methods of operation are challenged.

The press release can hardly be faulted for noble intentions. The draft regulations, however, will make trustees’ heads hurt. The draft is premised on the fantasy that there are sufficient funds with sufficient trustees who have sufficient competence and capacity to make the regulations work.

Even if there are, the next question is whether the regulator (the Financial Services Board or its successor under “twin peaks”) has or will have the competence and capacity to ensure that they do work.

Moreover, the draft is vague on penalties for non-compliance. An effect of penalties could be to frighten trustees, not necessarily to sharpen their acts but possibly to abandon their office. As it is, the level of expertise expected of them – right down to the appropriateness of living annuities – stretches the boundaries of the mooted cart-before-the-horse training to meet “fit and proper” qualifications.

McCarthy . . . unmistakable

On the table is much of what Dave McCarthy, consultant to Treasury, has been proposing all along. The latest documents bear his unmistakable imprimatur of analytical acumen. He’d previously been pounding the pavements to get stakeholders onside. Some were; others weren’t. Now here we go again, erudite discussion papers being steps removed from enforceable regulation.

Were it only possible, as the explanatory memorandum puts it, to achieve the intended objectives by the expedient of issuing new regulations under the Pension Funds Act where the duties of trustees will be “clarified”. The regulations are designed to remedy the “lapse” by which “in many instances, fund boards appear to have given insufficient emphasis to simple initiatives which would substantially improve the retirement outcomes of members of their funds”.

So lay on additional duties for trustees. Amongst things, the draft proposes that:

  • Rules of all retirement funds must provide for a default annuity strategy. Boards will have to ensure, and be able to demonstrate to the Registrar on request, that the default annuity policies are appropriate for members who will automatically be enrolled into it. But members don’t have homogenous profiles. They differ in terms of income, period to retirement, debt levels, number of beneficiaries and so on. Somehow, they’ll all have to fit into the limited range of defaults. Implicitly, trustees will need to consider the profiles of each member (numbered, for many funds, in their thousands). Then the Registrar will have to assess trustees’ compliance. Practical?
  • The fund’s high-level objective, underlying asset allocation and fund return net of all fees and charges must be communicated to fund members on a regular basis in clear and understandable language. Nice sentiment, just like the King code has been recommending for years that companies communicate their results in clear and understandable language. Until there is an upsurge in consumer financial education, is it reasonable to expect members to have the foggiest notion of, for example, “underlying asset allocation”? The communications must do more: to explain not only what the terms mean but also their relevance. Is it too much to ask that they also tell members in which companies their money is invested? Further, that “regular” communication isn’t merely annual benefit statements, dutifully printed and posted, but more frequent missives using technology that encourages interaction?
  • Members must be given access to a retirementbenefits counsellor not less than three months McCarthy . . . unmistakable imprint before their retirement. Advice doesn’t come free. So who’ll pay for it; the member, the fund (i.e. other members), or the employer? The draft doesn’t say, except for earlier intimations that they should be free of “commission bias” (i.e. not paid by product providers). Moreover, considering the number of members who retire annually, advisors can have a field day for fees. Who’ll chose the advisors and with what confidence in their ability or independence?
  • Passive or enhanced passive investment of listed assets must be considered. Okay, so trustees will consider them. Then what? There’s no obligation to consider passive investment strategies cursorily or deeply, to include or dismiss them, or to explain either. Are trustees expected to fall on one side or the other in the unresolved contention over the respective merits of passive versus active?

Some other observations:

  • In bold type, the explanatory memorandum emphasises that the proposed regulation “imposes no restrictions on the ability of members to withdraw their money from the retirement system when they change jobs, thus guaranteeing vested rights”. Put differently, it implies that preservation won’t be mandatory for existing members of pension funds. Further, taking “when they change jobs” also to mean when they lose their jobs, they’ll still be able to cash in their pensions. It’s a necessary accommodation, especially of lower-income earners who have financial priorities other than planning for old age, but it does undermine the preservation concept. So too does the probable extension of the R75 000 savings threshold by which members won’t be obliged to annuitise.
  • Portability requirements are designed to ensure that members “do as little as possible” for their savings to remain in the retirement system. Right on! Inertia is a characteristic of fund members, which is also why they’re required to advise their fund in writing if they don’t want to participate in its default offering.

Ismail Momoniat, deputy director general at Treasury, has told parliament’s standing committee on finance that he hoped the reforms would take effect from March next year. Given the volume of legislative amendment required, and the amount of detail to be debated, he might be optimistic. With tax increases imminent and the jobs market shrinking, both impinging on household incomes, at this stage it’s tactically wiser to talk about preservation in a quiet voice.