Your retirement fund is likely to be compelled to offer you a default pension or annuity at retirement. But you will have to actively select either the annuity offered or a retail annuity, or your retirement from the fund will be deferred.
This is the latest proposal from National Treasury in its second set of draft regulations forcing retirement funds to set default options for your investments in the fund, preserved savings, and your pension on retirement.
The second draft of the far-reaching regulations under the Pension Funds Act, which aim to nudge you towards saving in suitable investments until retirement, preserving your savings when you change jobs, and converting your savings to a suitable pension at retirement, was published for comment yesterday.
In addition, Treasury published a number of proposed changes to the regulations and Policyholder Protection Rules under the Long and Short Term Insurance Acts to ensure that insurers abide by the principles of Treating Customers Fairly and to implement some of the proposals in the Retail Distribution Review, which is intended to stamp out conflicts of interest in the distribution of financial products.
The draft pension fund regulations don’t remove your right to withdraw your retirement savings from an employer-sponsored fund if you leave your job, but will force you to think twice about doing so.
The revised draft relaxes and simplifies provisions published for comment almost a year-and-a-half ago after the retirement industry pointed out numerous practical difficulties with the first draft.
DEFAULT ANNUITIES
The draft regulations propose that all defined-contribution funds, including retirement annuity (RA) funds, be required to have a default annuity for you to convert your savings into a pension at retirement.
The first draft proposed that, at retirement, you would automatically receive an annuity provided by your fund unless you chose a different annuity option.
Treasury says in the explanatory memorandum to the second draft of the regulations that concerns were raised about the implications for you of your fund automatically giving you a default annuity, because if the default was a life, or guaranteed, annuity, the decision would be irreversible.
Guaranteed annuities guarantee you a pension for life, but your capital remains with the life assurer when you die unless you have elected that the pension be paid for a guaranteed period, such as the first 10 years.
The revised draft proposes that you will not automatically be defaulted into a particular annuity, but will have to select or “opt in” for the trustee’s choice of annuity or annuity strategy.
The first draft of the regulations proposed that your fund should be able to offer you a default guaranteed annuity provided by a life assurance company, but if it offered you a living or with-profit annuity as a default pension, the annuity would have to be provided by the fund itself (an “in-fund annuity”).
In a living annuity, you invest your retirement savings and draw an income from the capital and the growth on that capital. You take the risk that your savings will be sufficient to provide you with an income for the rest of your life.
A with-profit annuity guarantees you a particular pension for life but the increase in that pension is not guaranteed and depends on the performance of investments made by the life assurance company on your behalf and the life spans of the annuitants.
The revised draft regulations state that your fund can offer you any annuity either from within the fund or from an outside provider, provided that certain principles are complied with, Treasury says.
It was proposed in the first draft of the regulations that if a fund offers you a default living annuity, the amount you can draw as an income must be restricted, depending on your age. Treasury says there is a case for the amount you draw to be guided by your age as well as the capital amount you have at retirement.
The regulations will, for the time being, oblige you to draw an income in line with an industry standard on living annuities such as the one drawn up the Association for Savings & Investment South Africa. Treasury says this could be enhanced or replaced by a standard set by the Financial Services Board.
DEFAULT PRESERVATION
The draft regulations compel your retirement fund to preserve your savings in the fund unless you decide to withdraw the money or transfer to another fund.
If you leave an employer and want to withdraw your money, your fund must arrange a consultation with a retirement benefits consultant. The consultant will have to explain to you the tax you will pay on a lump-sum withdrawal and the long-term implications of prematurely withdrawing your savings in terms of the income you will receive in retirement.
If you still decide to take your benefit in cash, you will have to make a written request to do so.
The first draft of the regulations proposed that, when you left an employer, you would be given a certificate saying you are a paid-up member of the fund. If you moved to a new employer, your new employer’s fund would have to check on a database of all paid-up members whether you had any retirement savings. It would then automatically transfer your money into the new fund unless you specifically told the fund you did not want it to be transferred, or it could not be transferred because it was in an RA.
This would allow your pot of retirement savings to follow you from job to job.
The revised second draft clarifies that your pot(s) of retirement savings can be consolidated only with your consent and not automatically.
Treasury says it received a number of comments that the regulations should specify a minimum amount for preservation, but it had decided against setting any minimums to be preserved as this would then no longer be a default.
The first draft of the regulations required fees to be the same for active and paid-up members. This has been amended. Only investment fees need to be the same while administration fees on paid-up savings must not exceed the average for active members.
DEFAULT INVESTMENT POLICY
The regulations will compel every retirement fund to have a default investment strategy. You may be given alternative investment options, but if you fail to choose one, the default will apply.
Initially, Treasury proposed that the default investment strategy should not include performance fees, loyalty bonuses or any similar cost structures. In the second draft there is no such prohibition on investments with guarantees or smoothing or on performance fees.
The regulations will compel your fund’s trustees to equally consider both passive and active investment strategies when choosing default investment portfolios.
Treasury notes that some of those who commented on the first draft of the regulations misunderstood this requirement to mean that funds should adopt only passive strategies when designing default investment options. This requirement has been amended to clarify Treasury’s intentions.
• The regulations are available on the National Treasury and Financial Services Board websites: www.treasury.gov.za and www.fsb.co.za. Treasury is calling for technical comments on the retirement fund regulations by February 15 next year and on the insurance regulations by February 22 next year.