While government regulations may be proving a headache for retirement fund trustees and hastening the migration of stand-alone single-employer funds to umbrella funds (retirement funds that accommodate multiple employers), there are promising early signs that they will lead to better outcomes for fund members when they retire.
This emerged in the findings of Sanlam’s industry-wide 2019 Benchmark Survey of retirement fund trustees and consultants, as presented at the recent Sanlam Benchmark Conference held in KwaZulu-Natal, Gauteng and the Western Cape.
The retirement industry is consolidating rapidly, in line with National Treasury’s objectives. Viresh Maharaj, the chief executive of Sanlam corporate sales and marketing, told the conference, which was themed “Enabling financial resilience”, that in 2005 there were about 13 000 retirement funds in South Africa. Fast forward to this year, and the number was down to about 1500, of which about 350 were in the process of transferring primarily to umbrella funds. Maharaj said although there was still a place for stand-alone funds, many would need to enhance the quality of their offerings to compete against commercial umbrella fund providers.
Treasury’s so-called default retirement fund regulations, which require funds to provide default investment, preservation and post-retirement strategies for members, as well as offer them retirement benefits counselling, came into effect on March 1 this year. Their aim: to improve members’ outcomes, particularly through preserving their savings, but also through paying lower costs and making better-informed investment decisions.
Many retirement funds were caught on the back foot, even though they knew well in advance that the regulations were coming - about a third of funds have applied for a temporary exemption. The more progressive funds, on the other hand, implemented many of the requirements on their own initiative, well before the regulations came into force, and it is research among these funds and among employee benefit consultants that is tentatively showing that, while onerous on funds, the regulations may be having their desired effect. This is particularly the case where funds have implemented retirement benefits counselling.
Retirement benefits counselling, as envisioned in the regulations, is communication with you, the member (either written, telephonic or face-to-face) explaining the available options at important points along your retirement journey - including when you resign from an employer and before you retire. A critical intervention is when you change jobs, because the temptation is to withdraw your savings in cash. When the implications of such a decision are fully explained to you - and this has been sadly lacking in the past - you may be more likely to preserve your money, letting it enjoy the “miraculous” benefits of compounding over the rest of your working career.
Maharaj said Sanlam has seen a 20% improvement in preservation rates for fund members who received counselling compared with those who did not. And 88% of employee benefits consultants questioned in the Sanlam Benchmark Survey believed that benefits counselling would improve outcomes for members.
Hard evidence of the positive effects of counselling came from a study of one of South Africa’s largest stand-alone funds.
Avishal Seeth, the Gauteng branch head of Simeka Actuaries and Consultants, and Elrina Wessels, the head of strategic consulting at ACA Employee Benefits, reported at the conference on their study of a fund with more than 30 000 active members and assets greater than R25 billion. The fund implemented retirement benefits counselling in 2015, and has seen a drastic change in member behaviour, and positive impact on member experience.
There were gratifying results among retiring members choosing an annuity (pension). While living annuities are extremely popular in South Africa as a means of funding one’s retirement, they present a number of risks (see “Definitions”). Life annuities, on the other hand, may have their disadvantages, but are safer because they pay out for life. The fund in question employed a counsellor pro-actively to call members at least three months before they retired to explain their annuity options, and a significant difference in annuity choices was noted after this intervention.
The effects of the interventions were noticeable almost immediately, said Seeth and Wessels. In 2015, of the 351 members who retired and kept their savings in the fund, 248 (or 71%) opted for a living annuity and 103 (29%) chose a life annuity. The counsellor was appointed in November 2015. The following year, of the 243 retiring members, only 83 (34%) chose a living annuity, while 160 (66%) decided on a life annuity.
While benefits counselling does not constitute financial advice - the facts are merely presented and no recommendations are given - the advisory fraternity has raised concerns that financial advisers’ jobs may be at risk under the new regulations.
Barend le Grange, the head of individual member support at Sanlam Employee Benefits, told delegates at the conference, many of whom were advisers, that there are indications that the reverse will be true and counselling will nudge people into seeking out advisers for a more in-depth discussion about their finances.
Preservation: The act of keeping your retirement savings invested when you leave an employer.
Living annuity: a market-linked investment product from which you draw a pension income, at your discretion, up to 17.5% a year. You risk depleting your capital before you die.
Life (or guaranteed) annuity: A pension provided by a life insurance company. It pays out until you die but, after a specified guarantee period, there will be no residual capital for your heirs.
The Sanlam Benchmark Survey
The 2019 Sanlam Benchmark research engaged retirement funding stakeholders to understand the drivers of better financial outcomes, continuing a tradition that began in 1981. This year, interviews were conducted among 100 principal officers and trustees of stand-alone retirement funds and 100 key liaison persons at participating employers of umbrella funds. Interviews with principal officers averaged about 70 minutes in duration, and interviews with participating employers were about 55 minutes each. Fieldwork took place between 18 February and 28 March 2019, across Johannesburg, Cape Town, Durban and Pretoria.