It is generally accepted that the main purpose of a retirement fund is to provide benefits for its members on their retirement.
Government has indicated in the explanatory memorandum to the draft Default Regulations, that was issued on 22 July 2015, that it is concerned that trustees appear to have given insufficient emphasis to simple initiatives which would substantially improve the retirement outcomes of members.
This is one of the reasons why government is proposing that all retirement funds must put in place default annuity strategies for its members upon their retirement.
Sustaining a lifestyle
One can, therefore, argue that the ultimate success of a retirement fund should be measured by establishing if its retired members managed to sustain a comfortable lifestyle up to the date of their death by only utilising the retirement benefit they received from their retirement fund.
However, many of the factors and conditions that are part-and-parcel of the measurement of a comfortable retirement lifestyle are not in the control of trustees. Also, the time-line of such measurement is historic and it would thus not assist a current board of trustees to take remedial and proactive action.
It is, however, possible that trustees can, by carefully analysing the various statistics of their fund, introduce certain initiatives that can increase the retirement outcomes for its members.
Net replacement ratios
One of the more valuable measurement tools that a number of boards of trustees have recently introduced is a member analysis that shows the net replacement ratio of members on retirement.
Many defined contribution funds are already using net replacement ratios to indicate to members how likely they are to reach a target replacement ratio on their normal retirement age. This is based on their current contribution rate and certain assumptions of the expected future cost incurred and investment return earned on their retirement benefits.
A replacement ratio of 70% is generally accepted as adequate to ensure a comfortable retirement. To achieve this, studies have shown that you need to save at least 15% of your monthly income over a career of 35 years or longer.
The member analysis, if presented properly, is also a valuable tool to inform members of the negative long-term impact of early withdrawals on their retirement savings and the benefit of making additional contributions to a retirement fund. The member analysis must however be presented in such a way to members that they are able to make proper and informed decisions based on the outcome of the member analysis.
Analyse profile data
Trustees should however not only rely on the member analysis to improve the retirement outcome of their members. They also need to ensure that, based on the profile of the fund, that other initiatives are introduced to guide and assist members to achieve the desired replacement ratio.
Trustees should analyse the profile data of the fund to obtain guidance on where initiatives or changes are required for the fund. Basic information about the fund profile can guide trustees to implement suitable initiatives.
Analysing the exit behavior of members will also guide trustees on the implementation of initiatives. The normal focus of trustees are long term savings for retirement, but analysing exit statistics will probably indicate that most members exit the fund as withdrawals and that these members have, on average, a very short membership in the fund. This would indicate that the introduction of proper default preservation would be a simple initiative that would improve the experience of members in the long run.
The unfortunate challenge
It is very important that trustees measure whether the desired outcome of an initiative was achieved as not all initiatives will deliver the desired results.
The unfortunate challenge that trustees are facing is that a large number of members are either unaware or just could not care about the consequences of an ill-advised decision.