Newly announced retirement funds default regulations will steer South Africans’ retirement outcomes in the right direction

Katherine Barker, head of Momentum FundsAtWork.

The announcement of the new retirement fund default regulations by Finance Minister Malusi Gigaba aim to improve members’ retirement outcomes by helping them to make more appropriate decisions.

Katherine Barker, head of Momentum FundsAtWork within Momentum’s Corporate and Public Sector said that Momentum welcomes this initiative as it will enhance members’ Financial Wellness”.

The new regulations drive default investment portfolios and preservation options in the benefit savings phase, as well as default annuity solutions when people retire.

In essence, the regulations require retirement funds’ boards of trustees to offer:

• A default investment portfolio that is not excessively complex or unreasonably expensive;
• A default in-fund preservation option for when members move between employers before retirement; and • An efficient, transparent and cost effective default annuity strategy to ensure that members can convert their retirement savings into a retirement income.

“However, what is key here, is that these regulations are best delivered through outcomes-based investing models” says Barker.

Default investment portfolios

Default investment portfolios are appropriate for members who do not specifically choose how their retirement savings should be invested. Going forward, a default investment portfolio should consider the objective, underlying asset allocation, fees and charges as well as expected risks and returns. “This requirement is aligned with Momentum’s Outcome-based Investing, which places the investor’s needs at the centre of the investment process to align investment and personal goals” says Barker. She continues that Momentum’s Outcome-based Investing builds portfolios around investment needs with the highest possible certainty of achieving these needs. Portfolios are flexible, adaptable and diversified considering all available asset classes, including alternative assets, and provide an attractive risk-adjusted return which provides a more consistent investment experience.

The default investment portfolio should also have reasonable and competitive pricing structures disclosed in understandable language. The regulations allow for performance fees to be charged as encouragement to asset managers to outperform the benchmark. Alternative asset classes, such as private equity and hedge funds, should still be considered in the asset allocation of portfolios.

Boards of trustees may select more than one default investment portfolio, as long as it complies with the principles in the regulations.

Default in-fund preservation options

Pension and provident fund boards need to offer a default in-fund preservation arrangement to members who change employers before retirement. The main reason for this is that where no default is in place, the practical default for many members is to take their retirement savings as a lump sum, essentially in cash, when they leave their employer. “This dramatically impacts their outcomes at retirement and this is why most members of retirement funds can only replace 10% or less of their salary earned just before retirement, once retired”, Barker says.

Barker says that the best way to increase a member’s probability of reaching their retirement goals is to remain invested. This is exactly what Momentum Outcome-based Investing prescribes to - making the member’s retirement goal their benchmark.

To achieve seamless preservation, the new in-fund preservation option should allow “paid-up” members, who no longer actively contribute to the fund on a monthly basis, to leave their accumulated retirement savings in the fund without paying any additional fees. To really help South-Africans have a better chance of reaching their retirement goals, retirement funds should gear themselves to automatically accept members’ balances from other retirement funds. This will ensure that members’ retirement savings follow them from employer to employer. “The Momentum FundsAtWork Umbrella Funds are already aligned to these principles as set out in the regulations” Barker confirmed.

Default preservation still does not take away the members’ right and option to withdraw their retirement savings upon resignation. However, members who want to withdraw their savings will be required to first seek retirement benefits counselling before making a final decision.

Default annuity strategy

Based on the new regulations, an appropriate, efficient, transparent and cost effective default annuity strategy is needed to ensure that members of pension, pension preservation and retirement annuity funds can convert their retirement savings into an income at retirement. Members should also be given access to retirement benefits counselling to help them understand the annuity strategy. They need to be given the option beforehand as to which type of annuity they would prefer. Again, Momentum’s Outcomes-based Investing philosophy is aligned to comply with these regulations.

Conclusion

Trustees will be playing an even more important role in ensuring that members achieve their retirement and investment outcomes. Barker is confident that the new regulations will assist trustees in embedding treating customers fairly frameworks, increase competitiveness in the market and provide cost-effective and value for money investment, annuity and preservation solutions to fund members.

However, these new regulations could increase the duties and fiduciary responsibilities of trustees and as a result, impact the costs of standalone retirement funds. This could promote standalone retirement funds to move to umbrella funds even more.

The new default regulations should be adhered by 1 March 2019 meaning that retirement funds have 18 months to implement the default arrangements.