Focus On Exit Benefits Crucial For Retirement Fund Members

19 June 2008 Old Mutual

Most retirement funds place great emphasis o­n providing members with sound retirement fund investments and risk benefits. However, if the risks that exiting members face are not dealt with properly or the benefits are paid inappropriately, members could face financial hardship with much of the hard work of the trustees being undone.

"An appropriate “end-game strategy” can greatly influence the size and usefulness of the exit benefits," says Craig Aitchison, Head of Old Mutual Actuaries & Consultants.

Aitchison says that in the case of death benefits, trustees have a legal duty to ensure that the benefit is paid in a way that is most useful to beneficiaries. "For example, money for a child should be paid to the guardian unless they cannot manage the benefit effectively in which case it should be placed in trust."

He says that trustees have a moral obligation to members exiting the fund for other reasons.

"Although payment in cash at retirement or o­n withdrawal is the norm, it might not be in the member’s interests,” Aitchison comments. “T.S. Eliot was quoted saying ‘the end is where we start from’. An inappropriately-paid exit benefit can be a serious handicap for the member as they move into a different phase of their lives or to new jobs."

"We believe that there are many relatively simple things that trustees can do to protect the interests of exiting members," advises Aitchison. “For example, trustees may want to consider automatically moving the withdrawal benefit to a preservation fund and providing counselling for members o­n the importance of not spending their accumulated retirement savings. Members who feel that they need access to money to tide themselves over until starting their next job can then elect to make a withdrawal from their fund.”

"A practical and effective communication strategy is important in assisting members to understand their benefit options and the implications of their choices o­n leaving or retiring from their fund," says Aitchison. Recent research conducted by Old Mutual has indicated that members often struggle to understand the written communication they receive, and many members may benefit from o­ne-on-one discussions or meetings in a group setting.

"Trustees do need to put the appropriate communication mechanisms in place, as part of their good governance duties," comments Aitchison. "They should also ensure that any financial advice given to members as o­n behalf of their fund is given by accredited financial advisors."

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