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SUB CATEGORIES General |  Savings & Investments |  Annuties | 

How to deal with default regulations

04 March 2019 Andrew Davison, Head of Advice at Old Mutual Corporate Consultants

The Finance Minister’s 2019 Budget had its central focus on the issue of Eskom’s dire financial position and how it would be funded and restructured. The Budget contained few surprises, which was probably to be expected in an election year.

From a retirement point of view there was very little news in the Budget. The key message that we noted was buried deep on page 171 of the 301 pages that made up the full Budget Review 2019. It simply read “the full implementation of the retirement-fund default regulations on 1 March 2019”.

For those trustees of retirement funds who have been fervently hoping for a postponement, this was probably as clear a sign as any that 1 March was the final implementation date.

What are the default regulations?
There are three regulations to the Pension Funds Act:
• Regulation 37 requires retirement funds to offer a sound default investment strategy.
• Regulation 38 requires that pension and provident funds offer a default preservation strategy.
• Regulation 39 requires funds to have an annuity strategy for members upon their retirement.

All three offerings should be appropriate, simple, cost-effective and transparent to improve the overall benefits enjoyed by members. Members should be provided with suitable communication in relation to the default investment strategy, including fees and performance on an ongoing basis. They should also be given adequate information and guidance about their options when they leave a fund, either before retirement or at retirement.

A fund default investment strategy is nothing new and it is unusual for a fund to not have one. However, the new default regulations will simply tighten up on the requirements that such a default investment strategy should meet. The valuable aspect of this regulation is that the default will receive more focused attention, and this will hopefully lead to better quality solutions being developed to provide better long-term returns, net of fees, which would translate into better accumulation of assets by members. This is particularly relevant as the majority of members in any fund are usually invested in the default and only a few make individual investment choices.

The new regulations intend to bridge the gap between pre-retirement and post retirement and aim to deliver better retirement outcomes for members. The default preservation options will add huge value to members by giving them cost effective and easy-to-access methods of preservation.

The industry has been aware of these changes since they were promulgated on 25 August 2017. They align with the principle of Treating Customers Fairly which governs the way all financial-services providers treat clients. They also emphasise a management board’s fiduciary duties to act in the best interests of the members.

What are trustees to do?
By now trustees should already have been exploring options and reviewing the solutions offered by service providers in order to develop the appropriate solution and appoint providers to deliver the solution to members.

Even if trustees have already developed and implemented their fund’s default solutions, there is still a lot of work to be done. It is essential that they carefully document the process followed and the decisions taken as compliance by boards will need to be evidenced. The fund’s Investment Policy Statement must be updated to reflect any changes and to specifically reference Regulation 37. It should also refer to the annuity strategy that the fund has put in place and ensure alignment between pre and post retirement investment strategies. Trustees should consider drafting an Annuity Policy Statement to document the fund’s annuity strategy.

There is also the important issue of communicating the default solutions to members and ensuring that they understand the options and solutions available to them, including any access to Retirement Benefit Counselling. A further guidance note offering interpretational and other guidance in respect of the default regulations was issued by the Financial Sector Conduct Authority (FSCA) on 12 December 2018.

There are two further draft conduct standards that are still to be released, covering living annuities and smoothed bonus portfolios. Those funds that utilise smoothed bonus portfolios for their default investment strategy and those funds that have selected a living annuity as part of their annuity strategy will need to review their solutions to ensure that they comply once the final documents are released. The FSCA has indicated that these will be issued shortly, but with a delayed implementation date.

Those boards of trustees who still:
• need assistance with reviewing their default investment strategy to ensure that it is compliant with the Regulations 37 or
• require assistance to ensure their fund, its rules and the fund’s administrator will be able to handle members leaving their savings in the fund when they resign or are retrenched or
• are struggling to select and implement an annuity strategy for members who reach retirement;
should speak to their employee benefits consultant for advice.

What is the responsibility of the management committee member of a participating employer in an umbrella fund?
The Regulations apply to the umbrella fund trustees, so there is no additional requirement for participating employers. Where the default investment strategy of the participating employer is not the same as the trustee default investment strategy, it is advisable to liaise with either the trustees or your consultant to ensure that the default strategy utilised by your members is compliant with the Regulations.

In addition, you should be familiar with the default solutions adopted by the umbrella fund for all three regulations. Ensure that your members are aware of the default solutions and that suitable communication has been provided to enable them to understand the new options available to them, particularly when they exit the fund.

The Default Regulations have the potential to improve the retirement outcomes achieved by members. This should not be a tick box exercise but should rather be seen as an opportunity to make a difference in the lives of many pensioners. However, it will require a concerted effort on the part of trustees, management committee members and members alike, to ensure that quality solutions are implemented.

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