PPS RA Fund undergoes unique transformation

Nick Battersby, CEO of PPS Investments

The Board of Trustees of the PPS Retirement Annuity (PPS RA) has announced the launch of a groundbreaking retirement annuity concept in South Africa that enables members of an old generation retirement annuity (RA) to access new generation RA benefits within the same fund.

According to Nick Battersby, CEO of PPS Investments - speaking on behalf of the Trustees - the improved cost and flexibility benefits of new generation RAs, that have become available in South Africa in recent years, has resulted in a significant amount of South African retirement savings being redirected to these new products. Adding to this, is the fact that limitations have been set on the penalties that life companies can place on clients transferring out of the older generation RAs, making switching to new generation RAs more appealing.

However, Battersby says ongoing wariness of value reductions that may be imposed, a reluctance to leave the comfort and security of their existing retirement annuities, a time consuming transfer process and the perceived complexity of moving to new generation products, remain concerns for investors considering transferring to a new generation RA.

Battersby says that in order to overcome these barriers, the PPS RA Fund has been restructured to introduce a new section within the Fund that provides all the benefits of the new generation of retirement annuities.

For example, legislation requires that any transfer between retirement annuity funds be subject to a lengthy transfer process (known as a Section 14 Transfer), which can take up to six months. To overcome this, the enhanced PPS Retirement Annuity allows members to convert to the new section without having to do a transfer. “The intra-fund conversion is a simpler administrative process and is far less time-consuming than a transfer between funds, with an average processing time of the conversion being 20 working days,” says Battersby.

He says the faster conversion process could have a significant effect on an investor’s value at retirement. “In principal, the benefits of new generation retirement annuities lie in their significantly lower cost structures and increased flexibility. The value of spending an extra six months in this type of retirement annuity should not be underestimated.”

Battersby says that the introduction of the new section in the PPS Retirement Annuity also provides many PPS Retirement Annuity members with the peace of mind of knowing that they will remain within the fund when converting.

The new unit trust based section of the fund has been set up to ensure that members do not have to sacrifice the security of being in a fund that is more than fifty years old and has more than R20bn in assets between 120 000 members, having the opportunity to access the benefits of new generation products within their retirement annuity. Battersby says cognisance also has to be given to the fact that policyholders are still wary of the value reductions imposed by life companies to recover expenses on the members policy.

While recent legislation has capped the penalties that life companies can deduct, in certain cases they may still be significant enough not to warrant a change in their retirement savings. It is therefore important to ascertain from the insurer what level of value reduction will be applied to each individual case. This will largely depend on how long a member has been in the retirement annuity fund in relation to their pre-determined retirement date.

Members then need to weigh up whether the long term benefit they will receive from the improved flexibility and lower fee structures of their new section of the PPS Retirement Annuity will outweigh any value reduction that may be imposed during conversion.

Battersby says that in instances where it may not be appropriate to convert, members now have the option to pay additional contributions to the new section of the PPS Retirement Annuity, while maintaining their original contributions.

He adds that as new generation RAs allow for more flexibility in contribution, converting may also make sense for professionals working past their original retirement date. “We believe that the initiatives that the Trustees have introduced will encourage members of the PPS Retirement Annuity to access the benefits that new generation retirement annuities can offer in instances where it is viable for them to do so,” says Battersby.