New regulations are to your benefit but tough on pension funds
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In an industry-changing move, the amended Pension Funds Act regulations came into effect on September 1, bringing about welcome reforms. But implementation could pose challenges for the trustees of retirement funds who are already grappling with governance issues.
The amendments, known as the retirement fund default regulations, have been in the pipeline since July 2015 and were gazetted by National Treasury on August 25 this year.
All new default arrangements that come into operation after September 1 must comply with the requirements set out in the regulations. Existing default arrangements will be expected to be fully aligned with the regulations by March 1, 2019.
Retiring members often select expensive pension products and expose themselves to the risks of uncertain markets, putting their capital at risk and possibly outliving their pension.
Often, members’ poor choice of pension product is a result of not accumulating sufficient savings, because their contributions were too low or they did not preserve their savings, or their fund earned low returns, paid expensive fees or had a suboptimal investment strategy.
The regulations aim to improve the outcomes for fund members by ensuring that they receive good value for their savings and retire comfortably.
In terms of the regulations, boards of trustees will have to think beyond saving to retirement age and consider “cradle-to-grave” investment goals. They will be required to assist members during both the accumulation phase and the retirement phase. Prior to the regulations, trustees were required to assist members only during the accumulation phase.
The regulations resonate with regulation 28 of the Pension Funds Act, which requires trustees to consider their fund’s liabilities (or, in this case, each member’s retirement goals) when investing.
Trustees of defined-contribution funds (most retirement schemes in South Africa) will have to comply with the new regulations by formally implementing a default arrangement for current fund members, members leaving the fund and retiring members. Where a fund has already started putting any of these default arrangements in place, the board has until March 1, 2019 to align them with the new regulations.
Although the regulations have been in the pipeline for at least two years, implementation of default annuities has been slow. About half of the respondents to the 2017 Sanlam Benchmark Survey – many of whom are trustees – indicated that they have not yet started to implement default annuities. This hints at the governance issues with which many trustees already struggle.
Trustees are likely to face two additional challenges when implementing a default annuity strategy. The first challenge will be to navigate their way through the various types of annuity products, many of them quite complex, offered by the different providers. The second challenge will be engaging with generally disconnected and uninterested fund members to align them with an appropriate default annuity product.
In the race to implement default arrangements, and in light of the challenges mentioned above, the risk is that trustees will opt for off-the-shelf turnkey solutions that are tacked onto existing options.
Instead, trustees should see the regulations as an opportunity to reframe their view on the “cradle-to-grave” journey from their members’ perspective.
RisCura believes the regulations are 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 taking advantage of the institutional benefits offered by the accumulation phase.
Petri Greeff is the principal of investment consultancy RisCura.