Category Retirement
SUB CATEGORIES Annuties |  General |  Savings & Investments | 

Old Mutual welcomes National Treasury proposals on default preservation and annuities

20 March 2014 Craig Aitchison, Old Mutual

Old Mutual has welcomed the proposals contained in the “2014 Budget update on retirement reforms” released by National Treasury late last week, particularly those relating to default preservation and default annuities.

Default preservation
Craig Aitchison, GM of Corporate Customer Solutions at Old Mutual Corporate, says Old Mutual supports the proposal to default members’ withdrawal benefits into appropriate default preservation funds as it will strongly encourage savings and should result in higher retirement savings. This is especially true for members who are not actively managing their retirement savings.
"Default preservation will lead to more assets in the industry, which will lead to more cost savings to members through increasing economies of scale. In time, the average member will retire with more assets.”
Currently, when a member exits their current employer, cash withdrawal is the unintended default. The findings from the 2013 Old Mutual Retirement Monitor showed that of the respondents who took cash on leaving their fund in the past 15 years, 61% accessed their entire entitlement in cash. "The reforms around default preservation will help promote savings. Members often elect to take their retirement savings in cash as they are unaware of better options available, such as transferring it to a preservation fund.”
Aitchison also welcomes National Treasury’s revised proposal on how much access to retirement savings members will be allowed to have once it becomes compulsory to preserve savings.
While Treasury had suggested that members be allowed one withdrawal per preservation fund each year until retirement (up to 10 percent of the value of their retirement savings), the latest discussion document proposes one withdrawal per taxpayer each year, up to 10 percent of the value of the fund from which the withdrawal is made.
"This would remove the temptation for members to cash in too much of their retirement savings before retirement age.”
More member education will be needed. "For example, members will need to be made aware that they have one withdrawal per year, irrespective of the number of preservation funds they have. This could also make consolidation of preservation funds per member level ideal for some members.”
Aitchison advises that members be involved in the process of transferring to a preservation default fund. "When members voluntarily transfer their benefits to preservation funds, they are far more committed to the process and more likely to keep administrators updated on their personal information, which would reduce the number of unclaimed benefits.
"It is important that trustees design an investment strategy for the default preservation that will cater for the majority of the members. We expect the default funds to take in the bulk of preservation assets.”
The draft set of regulations on default strategies will be released before May.
Default annuities
Aitchison says Old Mutual Corporate also supports Treasury’s proposal that retirement funds must offer default annuities. "The 2013 Old Mutual Retirement Monitor results showed a lack of awareness and education about retirement annuities across all income, age and fund membership levels. Only 33% of respondents have heard about annuities previously, while 29% have never heard the word ‘annuity’ used in the context of retirement planning.
"Default annuities are a great way to ensure that the majority of members end up with a sensible product that provides retirement income at a low cost. Choosing a suitable annuity at retirement can be a daunting and complex process for many and we support making default offerings suitable for members and easy to understand.
Aitchison is circumspect about the proposal that members whose retirement savings are automatically invested in default investment portfolios must be permitted to instruct their funds to disinvest some or all of those savings from those portfolios.
"Allowing switching may not be in the best interests of a client, even with no penalties or commission, as it encourages poor investment decisions. For instance, exiting investments at the bottom of a performance cycle and entering at the top could destroy value in the long run. We therefore encourage clients to seek advice before switching to avoid value destruction.”
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