There is less than a year to go before the government’s default regulations under the Pension Funds Act, designed to improve your retirement prospects, kick in.
The regulations state that retirement funds must provide their members with access to counselling regarding their fund options. This is important when you join a fund and during the course of your membership, but it is essential when you cease being an active member, either when you resign from an employer or when you reach retirement age.
At such critical points in your membership, you will face a number of options in a defined-contribution fund. (Employees who belong to rapidly dwindling defined-benefit funds have fewer choices, and the defined-benefit Government Employees Pension Fund is not subject to the regulations.)
- On resignation, you will, essentially, have four choices under the default regulations: withdraw your savings in cash, transfer your savings to a retail preservation fund, transfer to the fund of your new employer, or preserve your savings in the fund as a paid-up member.
- On retirement, your choices will be to buy a pension with the bulk of your savings (at least two-thirds, if you are in a pension fund and your fund value is more than R250 000), either through an annuity offered by the fund or one offered on the retail market, or to preserve your savings until you need them. Provident fund members will still have the option of a cash lump sum, pending ongoing negotiations.
In either case, the decision will be a big one, and it is likely to have an impact on your quality of life in retirement. Among other things, the tax implications of your decision will be a vital consideration.
A prime aim of government is that you preserve your retirement savings when you change jobs, which, it is hoped, the counselling requirement will promote.
However, the definition of counselling does not mention financial advice. According to the regulations, “retirement benefits counselling means the disclosure and explanation, in a clear and understandable language, including risks, costs and charges, of:
- The available investment options;
- The terms of the fund’s annuity strategy;
- The terms and process by which a fund handles preserved benefits; and
- Any other options made to members.”
It is likely that funds and fund administrators will roll out counselling in different ways. The bare minimum could be to provide you with written communication explaining the options open to you, enabling you to make an informed decision.
On the other hand, if your pension fund was intent on securing the best possible outcome for you, it would go much further and provide access to professional advice. This would typically involve a one-on-one discussion with a qualified financial adviser. Such a session would have to comply with the Financial Advisory and Intermediary Services (FAIS) Act, which, among other things, requires an analysis by the adviser of your financial needs, followed by his or her recommendation of investment or annuity products appropriate to your circumstances.
However, the drawbacks of funds providing you with full-blown financial advice are twofold:
- It is more expensive (and not cost-effective for members with low levels of savings); and
- It places greater legal obligations on funds and/or their administrators, who must ensure that the advice complies with the FAIS Act.
In recent research presented by David Gluckman, the head of special projects at Sanlam Employee Benefits experts, and released alongside Sanlam’s annual Benchmark Survey of retirement funds, it appears that with less than a year to go before implementation, “there is no general view on how counselling should work”.
In a voluntary online survey of Sanlam- and ACA-administered retirement funds between March 27 and April 22 this year, 109 respondents indicated the following in response to the question, “What do you understand is included in retirement benefit counselling?”:
• Written communication: 29%;
• Human resources to provide counselling: 14%;
• Administrator to provide counselling: 22%;
• Fund will use an employee benefits adviser: 14%; and
• Fund will use an independent financial adviser: 21%,
In a separate survey of 80 professional employee benefit consultants, access to retirement benefit counsellors was the most favoured model. This model is a step below advice, involving interaction between the counsellor and the individual during which factual information about the options available, processes and rights is provided. But it stops short of rendering advice, specific recommendations or product comparisons.
Although about half of these consultants indicated that counselling could improve the preservation of retirement savings “a great deal or a lot”, two-thirds believed funds would do the bare minimum to comply.
Says Gluckman: “There is a large section of fund members who will not receive financial advice because they do not have enough accumulated to be of economic interest to financial advisers.
“Retirement benefits counselling, if implemented in the spirit of the legislation, provides the most practical means to fill that gap and empower fund members to make better financial decisions. Done properly, it complements financial advice by addressing a critical gap.”
It may be a good idea, even at this stage, to ask your human resources department or your retirement fund what level of counselling you are likely to receive in what may be the most important financial decision of your life.
If you don’t have a private, trusted financial adviser, and it appears unlikely that your fund will provide full-blown advice, it may be worthwhile securing one sooner rather than later.