What constitutes a ‘good’ retirement fund - comparing the UK and SA
03 June 2013 | Magazine Archives FAnews & FAnuus | Employee Benefits | Kobus Hanekom, Simeka Consultants & Actuaries
The UK Government recently made it compulsory for employers to provide pension benefits to their employees. In an attempt to guide employers to identify a good retirement fund they laid down six principles. We asked Kobus Hanekom of Simeka Consultants & Actuaries to compare the UK principles with South Africa’s benefit structure approaches. He draws on Simeka’s approach by way of example.
In terms of the first principle, UK employers ought to look for schemes that are designed to be durable, fair and deliver good outcomes for members.
In South Africa’s legislation terms such as ‘permanent’, ‘bona fide’, and ‘fiduciary duties’ are used– and they probably amount to much the same thing. What we do not have is a focus on benefit outcomes (we focus on investment returns) and a generally accepted measure with which to do comparisons. As a consultancy, Simeka tries to ensure good outcomes using the following strategies.
Every retirement fund should have a vision and a mission relating to the level of retirement benefits it aims to provide for members. This is typically expressed as a net replacement ratio (NRR) or a percentage of final salary. An NRR capacity report will tell trustees what their current benefit structure is capable of producing over a period of 35 years based on the fund defaults. It determines the ‘horsepower’ of the benefit structure. Default strategies take advantage of what we have learned from behavioural finance. Whenever a choice is offered members should be provided with an appropriate default option. The four most important default strategies are the contribution rate, the preservation option, investment choice and annuitisation.
The fund should have a comprehensive scheme governance framework, established at set up, with clear accountabilities and responsibilities agreed and made transparent.
We developed a Fund Governance and Risk Management Plan (FGRMP). It is a list of duties and responsibilities, with clear accountabilities, recording when and by whom tasks will be performed.
Those who are accountable for scheme decisions understand their duties and are fit and proper to carry them out.
Because there are no qualifying criteria to be a trustee in South Africa, we rely on a range of measures to ensure that decision makers are ‘fit and proper’ and their decisions are sound. These include ensuring that enhanced PF130 documentation, such as a trustee codes of conduct are in place, making sure trustees have done the minimum training; that the FGRMP is actively monitored by the Principle Officer (PO), who is required to sign all agreements and attend to all legalities before any resolutions are implemented.
The fund should benefit from effective governance and monitoring through its full lifecycle.
Based on King III we require the PO to provide trustees with regular governance assurance. This is done on the cumulative results of the FGRMP, the way in which the top 10 risks in the Risk Schedule is dealt with, the performance assessments of all officers, subcommittees and service providers, King III and TCF compliance, the PO’s personal assessment of the complaints received and the general fund activities as experienced.
Schemes are well administered with timely, accurate and comprehensive processes and records.
The detail has typically been captured by now so we require that the service of the administrator complies with the service level agreement and we do regular market comparisons to ensure the fees are competitive.
Member communication encourages member engagement and allows them to make informed decisions about their retirement savings.
In addition to member information sessions, financial tools and examples, we advocate that structured financial advice to members be facilitated or offered by the fund, on joining, on termination, and five years before retirement.
I believe funds that follow such an approach should compare well with the UK principles. But it is a work in progress. The new measures proposed by National Treasury and Treating Customers Fairly will require the implementation of many new measures.
