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Beating the Default Paradox: Better Support for Members nearing Retirement

17 September 2024 Karen Wentzel, Head: Annuities Sanlam Corporate Investments and Danie van Zyl Head: Smooth Bonus Centre of Excellence at Sanlam Corporate

Imagine you’re on a highway, with guardrails providing a safety barrier that protects you from going off course, guiding you safely to your destination. However, when you reach retirement, and the guardrails come off, leaving you uncertain. Which direction should you take to ensure the rest of your journey is safe?

That’s what it’s like for many employer retirement fund members who rely on trustee’s selected portfolios for their savings up until they reach the big R. Then they choose to navigate this new, complex terrain alone, which can lead to suboptimal outcomes. The guardrails come off, and uncertainty creeps in, this is the default paradox. At these critical junctures, well-timed retirements benefits counselling can make a massive difference to open members’ eyes to their options. Trustees have a pivotal part to play in actioning this member education.

The journey to retirement: The road well-travelled
Up until retirement, about 87% of members rely on trustees to select an investment portfolio for their savings. Three-quarters of funds also have a target income in retirement they work towards, with 60% aligning their default investment option to this target. This aims to stack the odds in a member’s favour to get them closer to their retirement goals.

The 2024 Sanlam Benchmark research shows that 71% of umbrella fund clients also believe in protecting members from market volatility as they approach retirement, for example, through a smoothed bonus portfolio. The bottom-line? The trustees put up guardrails in pre-retirement and members are happy to stay within them.

Then members reach retirement.

Choosing the right off-ramp at retirement
Members have travelled the ‘default’ path to reach retirement, but which path should they take next?

Retirement is a critical life stage point for members where they need to make one of their biggest financial decisions, picking a path for their post-retirement journey (through an annuity). It also when members need the most help.

Benchmark research shows most retirees (61%) wish they’d had more support at retirement. The reality is that most members are unaware of the post-retirement (trustee endorsed annuity strategy) options and support that their retirement fund’s offer.

This is where timely retirement benefits counselling could give members the direction that they need to make the right decisions to foster robust retirement outcomes.

Trustee-endorsed options: Get the guardrails back
The onus is on trustees to increase awareness of members options in both pre- and post-retirement, with proactive counselling and fund-supported advice to secure better outcomes for all.

One of the ways trustees can provide members with ‘guardrails’ as they approach post-retirement is to introduce them to their carefully curated trustee-endorsed annuity solutions to provide an income in retirement. These annuities are set up in line with Regulation 39 requirements and are often meticulously designed to balance cost-efficiency with financial security, making them a valuable resource.

However, many members end up with more expensive products, as members are not aware of their fund’s trustee-endorsed annuity strategy solutions. This means many members end up with more expensive products.
Trustee-endorsed annuity strategy options can offer the ‘guardrails’ that members are looking for and need on their journey to post-retirement. The following are the main benefits of Trustee-endorsed annuity strategies:

- The solutions are designed and structured by professionals who understand the nuances of retirement
- They typically offer lower fees, prudent risk management, and tailored strategies that align with a retiree’s changed financial goals and risk tolerance
- Where the default pre-retirement investments are geared towards accumulation, the trustee-endorsed annuity strategy options focus on longevity protection, cost effectiveness and inflationary increases (as shown by Benchmark research)
- These annuities are available at institutional pricing. To put this in perspective, a paper presented at the Actuarial Society of South Africa’s 2023 Convention on the “Fairness of annuity pricing for low-income earners in South Africa” by Combrink and Taylor, showed that the difference in pricing between an institutional and retail annuity vary from 6% to 27%. Cost efficiency can make a material difference in a member’s monthly income, and we are seeing two out of three members are missing this opportunity.

While life annuities may not the best option for everyone, given the current climate they are worth exploring. South Africans retiring with life annuities over the last 12 months have been benefitting ‘big time’ from the current high interest rates, which may soon be passing. This means members should seize the opportunity to ‘lock in’ great guaranteed escalation life annuity rates.

Trustees should amplify awareness of these kinds of options, so that members can ensure that their hard-earned savings are protected and optimised, providing a secure foundation in their wind-down years. Much like guardrails on an unfamiliar road, trustee-endorsed options provide the necessary support and security to guide retirees through their retirement journey with confidence.

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