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Advisers, this is the change you must rise to

07 December 2023 Gareth Stokes

The extent and speed of change in country population profiles and retirement fund regulation necessitates similar change in how financial advisers prepare their clients for retirement. As the South African financial advice and product provider communities prepare for the implementation of National Treasury’s two-pots retirement reform, it can be easy to lose sight of the transformative forces at work in the sector.

Big tech and retirement

Enter John Anderson, Executive: Solutions & Enablement at Alexforbes, who used his presentation to the 2023 Financial Planning Summit, hosted by The Collaborative Exchange, to unpack ‘how retirement funds will be transformed by consumer dynamics, regulatory change and social pressure’. It was a rather wordy title for a 30-minute-long presentation; but the complexity of the topic warranted it. His opening comments focused on the sheer pace of change that consumers have been exposed to on the back of technology, notably the introduction and rapid adoption of the smartphone. 

“Futurists are estimating that people who are 40-years old today will, by the time they reach 60-years and are ready to retire, experience the equivalent of 12-months of change [today] in just three-months [two decades from today],” Anderson said. “The change is exponential”. PS, spare a thought for the youngsters: because someone who is 10-years old today, upon reaching retirement in 50-years, is forecast to experience a year’s change in just 11-days. Turning to the South African retirement funding landscape, this change exhibited in the huge shift from defined benefits (DB) to defined contributions (DB); the industry wide focus on improving member outcomes; the harmonisation of regulatory treatment of retirement funds; and an aggressive focus on consolidation. 

Environment, governance and social (ESG) influences

Anderson also picked up on the trend towards responsible and sustainable investing, “Fund members care more about how their money is invested than ever; they want to have a say in where the money is going, and want to know that their money is having an [environmental and social] impact in additional to generating return,” he said. This desire will affect decision making by all stakeholders in the retirement industry, and extend to the financial and investment advice disciplines too. 

Another development that will affect investment decision making is the shift in global economic power, with China’s GDP forecast to exceed that of the United States by 2027, and India’s economy forecast to grow phenomenally over the next decade or two. “It is no longer about just understanding the developed world and what that means; it is also about understanding these emerging economies that are going to be playing a huge role going forward,” Anderson said. 

Artificial intelligence (AI) cracked a mention in almost every presentation to the 2023 Financial Planning Summit, in this case singled out for its potential to shape jobs; investment opportunities; and how both financial planners and retirement funds communicate and interact with clients and members. Once again, the audience was reminded of the likely impact that AI would have on the world of work, with this ominous quote ‘lifted’ from the Trend Compendium 2050 Megatrends report: “AI experts expect that, with a probability of 50%, [by] around 2060 unaided machines will be able to accomplish every task better and more cheaply than human workers”. 

Defined contribution funds are here to stay

Commenting on South Africa’s ‘population pyramid’, Anderson noted that by 2050 the country would have more people in retirement. From a financial planning point of view this means that people would have to save for longer and make better plans for their retirement. Some of the important observations in this segment of the presentation were that retirement fund regulation, even if sensible, could add cost and complexity to the retirement funding sector; that the oft-promised state-backed social security reforms were as far away as ever; and that South Africa would likely be “stuck with” a system of defined contribution funds focused on individuals. 

“The job of the adviser is going to become a lot more difficult,” said Anderson, before offering the Alexforbes view on five strategic outcomes that the future retirement fund would have to achieve. First and foremost, funds must be member-centric. “We are not focusing more on an average member or generic solutions; but rather on more personalised solutions that centre around the individual, making sure that the fund is geared towards that,” he said. The second focus is on strategic long-term thinking to make sure that retirements funds do their bit to offset systemic risks such as those posed by climate change. 

Adviser, employer, trustee working together

The third strategic outcome is for retirement funds, assisted by a board of trustees, to commit to and practise impeccable governance. This goes hand-in-hand with the fourth, which calls for the industry to be more impact-conscious. “More and more, you are going to start seeing retirement funds wanting to show the impact that they have; the biggest impact that we can have, as an industry, is to make advice more accessible to more members at an affordable price,” Anderson explained, before introducing the fifth outcome, being transparent stakeholder communication. All stakeholders must work together to deliver a win for members, and that ‘win’ is a sustainable income in retirement. 

The good news is that South Africa’s regulators are encouraging the industry to focus on member outcomes. According to Anderson, the so-called two-pots regulation is the latest step towards ensuring that retirement funds interact more directly with members. “Over the next year, the big retirement fund administrators will be getting ready to go forward with the two-pots system; upon implementation it will fundamentally [shift focus] onto the individual [and encourage administrators to] deliver service at scale, across the full member base,” he said. Alexforbes expects a two-times or higher improvement in retirement outcomes following the change. 

The following quote, lifted from the presentation slide deck, will resonate with administrators, financial planners, and retirement fund trustees alike. It reads: “The individualisation of the member’s experience of retirement funding is the biggest opportunity that we have to make an impact on people’s lives, by educating, informing and engaging them to make better financial choices”. Anderson ended his fast-paced talk by reminding the audience that the retirement funding industry was at a tipping point. 

“We have moved from a scenario where we only interacted when people joined, left or retired [from a fund]; now we are able to interact through all of the moments in members’ life stages, leveraging the available technology, and connecting members to financial advisers and planners to enable smarter financial decisions, all in a more scalable way,” he concluded. 

Making a real difference with valued financial advice

There is thus a tremendous opportunity for employee benefits consultants and financial advice professionals to partner with employer groups and fund administrators to make advice more accessible and make a real difference in members’ retirement outcomes. 

Writer’s thoughts:

Financial planners need to be up-to-speed on their clients’ retirement fund exposures and likely outcomes. Are current communications between administrator, employer and your advice practice adequate to meet your client’s financial planning needs? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Cynical Simon, 07 Dec 2023
National Treasury's two pots retirement reform, futurists forecasts of run away changes, transformation and environmental reform forces in society and A1; these all have become buzz phrases and buzz words used without proper understanding, but all are used either as Doomsday scaremongering or else as the vast unopened Pandora box of pleasant surprises and opportunities but mostly without substance. To hint ,for example, that the advent of the defined contribution regime was the great accelerator of the industrywide emphases on improved member outcome is far fetched. It is also part of the propaganda that portrays the defined contribution model as a positive breakthrough by fund administrators and trustees in reply to a need expressed by the members since as we all know it was a survival strategy for pension funds as the defined benefits model was fast becoming unsustainable and unaffordable.
I am convinced that we all will be better served if we put our heads and thoughts and skills together in a concerted effort to come up with a real solution to this problem because this vehicle has served it's purpose and ran its course and is no longer fit for use.
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Added by Gareth, 07 Dec 2023
Interesting point @Paul... It is quite likely that younger generations approach AI / tech differently to your typical IFA client book. PS, 'mostly false' is an awesome synonym for the looming Metaverse.
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Added by Paul , 07 Dec 2023
A great deal of IT and AI is gimmicky and at very least risky when used to interact with clients,let alone solve problems where a more qualitative approach is required.
These systems are let loose on the public by the tech giants in order to increase profits,nothing else.They cause unease and often a reluctance to engage due to a lack of understanding from the client's perspective.
But we all love this bright and shiny, mostly false world.


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