It was intriguing to read a recent Business Day article headlined NUM Warns Treasury On Pensions. In the article the National Union of Mineworkers (NUM) warned of a high possibility of strikes and protests, should Treasury proceed with its retirement reform plans.
NUM General Secretary, Frans Baleni, said that the union’s members were not happy with the manner in which the reforms were being introduced and that many believed their money would be stolen. He warned that unless government educated members they might strike to demand that their pension money remains untouched.
Creating yet another standoff
Treasury is unlikely to back off on its proposals, so the challenge will be to bring workers on board without the chaos that stems from misinformation. The Financial Intermediaries Association of Southern Africa (FIA) has often communicated to Treasury that retirement reforms will have to be painstakingly communicated to all stakeholders.
Compulsory preservation and reflecting Provident Fund deductions as fringe benefits on employees’ payslips are just two examples of practises that may sit uneasily with union members.
Changing the retirement mindset
Mandatory preservation is not the only challenge Treasury faces. The 2014 Sanlam Benchmark survey reveals that only 14% of retirees seek assistance from a financial adviser upon retirement. Treasury proposes to address this shortcoming by requiring that retirement funds offer their members default investment options and default annuities upon retirement.
Decisions about pensions and annuities are as unique to each retiree as their fingerprints which means that default solutions almost always result in poor or conflicted results. Consider the example where an employer selects its umbrella pension fund administrator as the provider for the default pension.
Who will provide the retiree with independent advice regarding the costs and the choice of pension where these are not provided for by the selected administrator? What if the retiree is considering entering a new employment contract where the new employer has a pension fund? What motivation is there for the adviser to recommend a preservation fund rather than a retirement fund?
Putting a plan into practice
There is also a difference between identifying an appropriate plan and sticking to it. Decisions that impact on current lifestyles include how much one can spend and how comfortable one’s retirement will be. These are best guided by advice that will balance logic and emotion. Only a financial adviser, when engaged early enough, can demonstrate the consequences of underfunding one’s retirement.
Ironically, the system that best protected employees, that of Defined Benefits (DB) pension funds, was tossed out of the window to protect the financial accounts of the employer, who was arguably better equipped to interrogate the costs and the benefits of the suppliers of retirement fund services.
The role of living annuities
What role can living annuities play? It can be argued that such products are the best solution to our current Defined Contribution (DC) retirement environment. At retirement, each retiree faces either an under-funded or an over-funded retirement prospect.
An underfunded retiree cannot survive on the income from a fixed annuity, nor can he or she commit to an escalating annuity. In contrast, the over-funded retiree is poorly served by the tax inefficient fixed annuity which forces a higher-than-required income and denies dependents access to the capital.
The choice of a living annuity is preordained by the lifestyle choices the retiree took during their working lifetime. It would be a tragedy if at the point of retirement the retiree compounded these choices by slipping into a default solution that will almost always be inappropriate.
Advice commonly given by you as the financial advisers to your mentees is not to take on clients who are likely to outlive their capital as it will inevitably taint your reputation. It is these retirees who should be subjected to a default employer solution.
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