Individual investment choices
The move from defined benefit to defined contribution retirement funds has shifted the risk of inadequate retirement provision from employers to the members and resulted in the subsequent evolution of individual member investment choice within retirement funds.
High-income earning members are generally financially literate, demand greater control of their total wealth management and are putting increasing pressure on trustees regarding the scope of investment choice available to members.
This has resulted in the development of the ultimate in individual member investment choice – access to a wide variety of collective scheme investments and direct share portfolios through the open architecture of an investment administration platform or LISP.
The logistics
Retirement fund trustees incorporate the open architecture of an investment administration platform as part of the fund's investment policy which enables the member, who fits a specific profile, to diversify and grow his or her retirement fund savings further, through a personalised portfolio of investments. The platform takes responsibility for all regulatory requirements of monies invested through the platform - Regulation 28 compliance (on member level), asset allocation reporting to the South African Reserve Bank, issuing of audit certificates, and various other reporting.
There are many benefits to the members.
Choice
In addition to the institutional investment portfolios offered to members, the introduction of the open architecture investment administration platform potentially opens up all the collective scheme investments and share portfolios available on the platform as well as the transactional and trading capabilities that such a platform offers to clients. The board of trustees can choose to limit the underlying investment options to support and expand the fund's current investment policy and the available investment options can be revised from time to time.
Flexibility
Members can package their retirement fund portfolios according to their own risk profile and personal needs and can combine their retirement and private portfolio investment strategies as far as possible. Migration between the institutional investment options of the retirement fund and the investment administration platform is possible and members choose their own level of exposure to the options available through the platform. The platform functionality makes frequent switching a reality.
Information and education
Due to the increased choice and flexibility, it is advisable that members seek the advice of specialist intermediaries to assist them in their investment decisions within the range of options available, thereby optimising value while also supporting trustees with their responsibility to supply adequate information to members.
Smooth transition on retirement
If allowed by the investment administration platform, investments can be transferred, at no cost and without realising the underlying assets i.e. selling the units, to an investment linked life annuity on retirement or to a preservation fund on the platform when the member leaves the employer. This "seamless transfer' is subject to the approval of the retirement fund and ensures substantial savings and continued market exposure into retirement or when changing employer.
Each member "pays their own way"
If individual member choice is already available to members of a retirement fund, the fund administrator generally levies no extra cost to the fund for the implementation of the platform and the various options available through this solution. Fees payable on the investment administration platform, to the underlying fund management companies and to intermediaries, are paid by the individual member using the platform. There is no cross-subsidisation between members.
Although this new generation of members' choice is not meant to replace the current institutional investment portfolios available to retirement fund members, it goes a long way in creating more choice and flexibility for the right member at the right time.
