Less advice and lower adviser remuneration on the cards
On 14 May 2012 National Treasury published a document titled Strengthening Retirement Savings: An Overview of Proposals Announced in the 2012 Budget. The document provides a broad brushstrokes outline of Treasury’s thoughts on reforming the South African
Technical Discussion Paper B, titled Enabling a Better Retirement Income, presents an overview of the current annuities market. It examines in detail the various products that life insurers, financial advisers and retirement savers depend upon to provide income through retirement. And it presents several options for reform. The good news is that the on-going documentary deluge is not prescriptive (yet)… Treasury is inviting the public and interested industry stakeholders to actively participate in a debate on improving income provision in retirement “to assist South Africa in building a fair and sustainable retirement system”.
Limited options upon retirement
We cannot improve on a system unless we understand how it works. In the opening paragraphs Treasury considers the options facing a retirement fund member upon retirement… They conclude that retirees “choose [from] the products on offer without much advice” with the result they “often end up choosing inappropriate products that leave them vulnerable as they age”. At first glance financial advisers and planners might take heart that the importance of advice is hinted at so early in the document. But the warm feeling dissipates with the realisation that Treasury combats this advice shortfall by further diluting the requirement for it. What income products do retirees currently favour?
“The Income Tax Act (1962, as amended) compels members of pension funds and holders of retirement annuities to use at least two-thirds of their accumulated balances to buy products that qualify legally as annuities,” observes Treasury… It makes sense, therefore, that the document assesses the so-called mandatory annuitisation products on offer domestically. These include conventional annuities and living annuities. Treasury defines these products as follows: “Conventional annuities provide an income for life, guaranteed by an insurance company or a pension fund regardless of how long the purchaser lives whereas living annuities are similar to a bank account, where purchasers bear the risks of the underlying assets and the risk that they might outlive their assets”.
Annuities play a huge role in the domestic retirement landscape. By 31 December 2011 the value of the annuities market stood at some R31 billion, more than three times the 2003 level. But there has been a major shift in the “mix” of conventional versus living annuity product. Nine years ago half of single premium purchases were for conventional annuities versus just 14% today! In layman’s terms the risk of providing income through retirement has shifted from the life industry to individual clients in much the same way as the move from defined benefits to defined contributions altered capital accumulation responsibilities in the retirement fund space.
Withdrawing the safety net at an inopportune time
A major flaw in the current retirement landscape is that the system provides strong support for formal retirement savers, but leaves retirees “high and dry” when they exit their retirement funds. Members of employer-sponsored funds have contributions deducted from their salaries and can depend on trustees to make investment choices. “Individuals receive substantial tax benefits when they contribute and investment returns in funds are free of tax,” adds Treasury. But when you exit the fund you are on your own, left to the mercy of the retail market. Risks include poor or commercially biased financial advice and high charges. And that brings us to another of Treasury’s conclusions (no surprise here): “Without some form of regulatory intervention, it will be difficult for South Africa to develop a functioning market in retirement income products that is suited to the country’s needs”.
How can the retirement income landscape be fine-tuned? Financial advisers and planners will not be happy with some of the “fixes” Treasury proposes. Because Treasury believes the answer lies in reforming living annuities to reduce the amount of financial advice they require and to reduce their costs. “The main overall conclusion is that current shortcomings in the annuities market are structural, requiring significant regulatory reform and consequent shifts by all key players,” observes Treasury. And that means stakeholders in the life and advice space should brace for more legislation. Treasury wants to tackle income in retirement from three angles, namely:
· To reform living annuities to increase competition, reduce the amount of financial advice they require and to reduce their costs;
· To increase the degree of automation in the retirement process by requiring all retirement funds to choose a default product into which all retirees must be enrolled; and
· To increase the degree of longevity protection for most retirees, without unduly sacrificing their ability to invest in risky assets or to protect capital for their heirs.
Get ready for more regulatory intervention
They go on to propose a number of specific interventions including the creation of a new tax-free vehicle based on collective investment schemes out of which retirement income can be paid. Savers will have no investment choice, but will be able to choose between vehicles with different underlying investments, and to switch from one vehicle to another. “Restrictions on permitted drawdowns will remain, must incorporate all charges and could be made age-related – but commissions for intermediaries will be more strictly regulated,” they continue. More bad news for those in the financial advice space!
Treasury also proposes a default retirement income product be selected by retirement funds. Two-thirds of members’ funds – based on an upper threshold – would be automatically “enrolled” in this product. Members would be able to opt out of this solution into other qualifying products if they so wished. Treasury wants these default products to meet requirements on design, access, costs and terms and have certain longevity protections built in.
Enabling a Better Retirement Income is available at http://www.treasury.org.za/. And the public is invited to comment on the draft proposals contained in this discussion document by no later than 16th November 2012.
Editor’s thoughts: Reforming South Arica’s complex retirement landscape will not be easy. To keep abreast of National Treasury’s vision you will – at the very least – have to study the six documents mentioned in today’s newsletter. From an intermediary’s perspective the major impact stems from Treasury’s desire to reduce distribution costs… Do you plan to read all six of National Treasury’s discussion documents and express you views by way of submissions to them? Please add your comment or send it to gareth@fanews.co.za
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