Edition: February/April 2018
RETIREMENT INDUSTRY MOVES TOWARD A CRADLE TO GRAVE APPROACH
Petri Greeff, Executive, RisCura
In an industry-changing move, the amended Pension Fund Act regulations came into effect on 1 September 2017 bringing about welcomed reforms. But, implementation could pose challenges for trustee boards that are already grappling with limited governance bandwidth.
The amendments, also known as the Retirement Funds Default Regulations, have been in the pipeline since July 2015 and were gazetted by National Treasury on 25 August 2017. All new default arrangements that came into operation on or after the 1 September 2017 effective date must comply with the requirements set out in these regulations. Existing default arrangements will be expected to be fully aligned to the regulations 18 months after the effective date by 1 March 2019.
Retiring members have often selected expensive retirement products and exposed themselves to the risks of uncertain markets. As a result, these members end up with insufficient capital and potentially outlive their planned pension. This is a consequence of not saving enough during their accumulation phase, either due to low contribution rates, lack of preservation, or low returns from expensive investment fees and suboptimal investment strategies. The regulations therefore aim to improve the outcomes for retirement fund members by ensuring that they receive good value for their savings and retire comfortably. Under these regulations, trustee boards will now have to think beyond retirement and consider “cradle to grave” investment goals. They will be required to assist members during the accumulation and the retirement phases of their life. Prior to these regulations, trustee boards were only required to assist members during the accumulation phase. These regulations also resonate with Regulation 28 that requires trustee boards to consider their fund’s liabilities (or in this case every member’s goals) when investing.
Trustee boards of defined contribution scheme funds (like the majority of retirement schemes in SA) will have to comply with the new regulations by formally implementing default arrangements for current fund members, for those leaving the fund and retiring fund members. Where a fund has already started putting any of these default arrangements in place, the trustee board has until 1 March 2019 to align it with this new default regulation.
Despite these regulations being in the pipeline for at least two years, implementation around default annuities has been slow. About half of the respondents to the annual Sanlam Benchmark Survey 2017, many of whom are trustees, indicated that they have not started default annuity implementation yet. This potentially hints at the limited governance bandwidth that many trustee boards already struggle with in a more regulated environment. In addition to the challenge around governance bandwidth, trustee boards will likely face two additional challenges when implementing a default annuity strategy. The first challenge would be navigating their way through various types of annuity products — many of them quite complex — offered by many different providers. There is also the challenge of engaging with generally disconnected and disinterested members to align them with the appropriate default annuity product.
In the race to get default arrangements implemented and in light of the challenges mentioned above, the risk is that trustee boards opt for off-the-shelf turnkey solutions that get tacked onto the existing options as an afterthought in a case of more haste, less speed.
Instead, should these challenges be overcome, this regulation offers a unique opportunity for trustee boards to reframe their view on the “cradle to grave” journey from their members’ perspective. Despite the challenges, RisCura’s view is that this is an opportunity to implement a retirement phase that complements the goal-driven investment strategy of the accumulation phase. Both phases can be integrated into a solution that allows for a seamless transition from pre to post retirement, while leveraging off the institutional benefits offered by the accumulation phase.