Wait and see

Funds play a waiting game, although there is always the law of unintended consequences as seen in the National Savings Fund (NSF), and what it could theoretically do to labour unions.

Highlights from the Sanlam retirement funds survey

Deon Booysen at Sanlam Employee Benefits, says that their 2006 survey should be seen in context of the discussion paper concerning the retirement industry reform, released in 2004 and the second paper which is late and should see the light of day at the end of June.

The survey involved 48 pension funds, 120 provident funds and 19 umbrella funds, of differing sizes.

Themba Gamedze head of the Sanlam Employee business says that government wants to increase the amount of coverage while increasing the quality. There should be portability, choice, simplicity, flexibility, a focus on post retirement needs and an improvement in quality and frequency of member communication.

On the question of the NSF the majority of respondents said that the NSF wont have a major impact on the majority of funds. In fact only three funds said there might be some impact.

When one considers that the NSF caters for people who irregularly save and are irregularly employed, some 2.3 million people, one wonders why funds see little impact of this initiative.

Essentially the government is targeting people who dont pay tax, and a lot of funds will be affected as people move. If this becomes an income related model, the predictions are that nearly 50% of members could transfer.

An unintended consequence could be that the union strength in the fund and the business may well be depleted as members opt to go to the NSF.

National Treasury doesnt like lump sums at retirement and this should be replaced by regular income as in their experience people turn to the state once the lump sum is depleted, says Booysen.

Only 8 of the 20 funds surveyed said that the treasury drive to do away with lump sumps would have an effect. On the Social Responsible Investments (SRI) side, a small percentage, 5 out of 188 funds, said they would get involved in SRI. There is no real appetite for SRI says Booysen, although the discussion paper suggests a 10% investment level into SRI.

Internationally the level of SRI in the USA is about 11%, or several trillion dollars, in one form or another. Armien Tyer, from Sanlam Asset Management, says that SRI is not a sideshow.

The duty of the trustee is to look after the interests of the members and the fund. Interestingly enough there is no mention about investments when it comes to their duties. SRI is not mentioned anywhere in Regulation 28, although there are four areas that could be construed to cover the SRI opportunity.

So there is enough capacity for trustees to explore SRI options.

In terms of the fiduciary duty of trustees, they have to act in the best interests of the member and the fund, and invest prudently. He (Tyer) maintains that in the region of R50bn could be earmarked for SRI, locally. Currently just 2% of assets are invested into the SRI asset class.

In terms of perceived risks, Tyer did say that the perception is not accurate. Investors/ trustees have a fiduciary duty to diversify their assets to reduce risk, and entering the SRI environment is a diversification play. Voluntary SRI is not a breech of the fiduciary duty.

Member choice is also not the flavour of the month, according to Treasury, although they do concede that there should be an appropriate default option, and these should be limited to between three and five choices and no more.

Interestingly enough although 50% of the funds offered member choice, no one had any comment on the individual choice issue in the survey. The Domini the oldest SRI index dating back to the early 1990s has been out-performing many other mainstream indices, including the JSE, which is currently valued at R3 trillion, and listed itself on Monday 5 June.

Booysen also says that there is a shift from death benefits to savings benefits. This is a continuation of a trend started in 2002, and 2004.

Editor's comments:
In the end this is a wait and see game, once again.