Retirement Reform – how will it impact advisers?
Many of National Treasury’s retirement reform proposals are likely to impact independent financial advisers. At first glance, compulsory retirement fund membership, compulsory preservation, and default annuities may even appear to be detrimental. But it is not all doom and gloom – plenty of opportunities exist. If the reforms are good for South African investors in the long run, they are good for advisers.
A high level look at the proposals allows some perspective on where those opportunities can be found:
Compulsory membership doesn't preclude the need for retirement planning
One of the reform proposals speaks to compulsory membership of pension funds. You may be concerned that compulsory membership will mean less business in terms of individuals looking for retirement funding solutions. However, in practice, clients need more than just product advice; they need a solid financial plan, encouragement to stick to that plan and help in addressing the gaps that may prevent them from achieving their goals.
Until we have a situation where most South Africans start saving when they start working, and never cash in their savings along the way, the money saved in an employer's fund won't be enough to retire on. And even when the system and investor behaviour improve, many of your clients probably won't want all of their savings tied up in a compulsory scheme and they will need your advice as to what products to use to complement their compulsory savings to help them to reach their goals.
Advice to small businesses
A totally different opportunity which could open up if compulsory membership comes into play is advising small to medium-sized businesses on how to set up compulsory retirement savings solutions for their employees. While this may not currently be a space you operate in, this is the chance to extend your product offering and grow your client base.
A solution which consists of individual retirement annuities managed on a group basis (such as Allan Gray's Group Retirement Annuity system), is an excellent choice for employers looking to give their employees control over retirement savings. Individuals become members of the retirement annuity fund in their own right, so on top of employers needing advice on the best solution for their staff, some individual employees may need guidance on the best underlying unit trusts for their age and circumstances.
Compulsory preservation opens up long-term opportunities
Another proposal in the discussion documents speaks to enhanced preservation, which will remove options, and thus potentially the need for advice, for people changing jobs. However, over the long term, more investors will arrive at retirement age with more capital. More capital means a greater need for good, independent advice and the ability to afford it.
Default annuities present financial planning opportunities
Treasury's proposals also envisage trustees playing a more prominent role in assisting retirement fund members in the transition from working and contributing to a retirement fund, to being retired and earning an income – from a default annuity.
It is not yet clear exactly what the obligations on trustees will be. But whether they merely offer a default annuity product at retirement, or go further and offer a more comprehensive service, individual members will need advice when it comes to assessing if the default option is suitable for them, and in making individual member choice around underlying investments (if the default product calls for it). The very nature of good advice is that it is targeted at the individual.
Encourage clients to take a long-term view
Perhaps the biggest challenge currently is the fact that few of the proposals are finalised; these are still discussion documents. The environment is slowly changing, but it is unclear when proposals will be signed into law. The problem is that you may give clients good advice today, based on the facts at hand, and regulatory changes may follow that have an effect on that advice tomorrow.
For example, the recent increase in the amount that can be withdrawn from a retirement fund tax-free (from R315000 to R500000) took many advisers, clients and other industry players by surprise. Clients who applied for a withdrawal shortly before the Budget Speech and received a tax directive, are still subject to the previous tax-free limit.
Probably the most sensible approach is to communicate with your clients and encourage them to take a long-term view to their retirement saving. This will avoid the reputational risks associated with being caught off-guard. The uncertainties in the regulatory environment could go on for a long time.
Create a compelling value proposition
Advisers help their clients to make sense of complexity and products available and in so doing, better equip them to match an investment to their needs and to react (or not) when things change. Most importantly, they help their clients to manage themselves with discipline, identifying and understanding how their emotions can lead them astray in the investing process. There is a place for good, unbiased advice regardless of what happens in the retirement reform environment – and perhaps even more so than before.
