Retirement reform places onus on trustees to increase disclosure
For trustees of retirement funds, potential retirement reforms currently under discussion by the government legislation will result in extraresponsibilities to ensure a minimum level of disclosure to members.
According to Craig Aitchison, MD of OMAC Actuaries & Consultants, in order to adhere to changing legislation and to keep members properly informed of these changes, funds need to urgently assess the readiness of their funds in terms of member communication and education.
He says new retirement fund legislation will include the obligation for trustees to improve basic legislated information to retirement fund members on a regular basis - possibly a minimum of at least two times per annum. “The aim of this disclosure is to ensure that members are able to make informed choices,” Aitchison says.
Aitchison advises trustees that the regular communication to members will be required to include basic fund information such as the contributions that the employer and member have already contributed; their pension benefit at retirement, adjusted for inflation and investment risk; and how much they still need to contribute in order to reach a particular replacement ratio.
He says the basic information should also include the benefits due to individual beneficiaries on death or disability. Furthermore, a clear breakdown of fees which shows administration and investment cost as well as the net benefit must be included.
“It is becoming a legislative requirement that members know where they stand, what they are paying for and what they need to still achieve before retirement. It’s no longer a nice-to-have,” says Aitchison.
Aitchison says keeping members up to date with the retirement reforms and the state of their retirement savings will require trustees to improve the level and content of the member education they provide. He urges funds to take steps to improve member education programmes and says trustees should pay particular attention to educating members on the importance of preservation and the importance of making benefit decisions.
“The focus here is particularly on ensuring that members are equipped with the knowledge they require to make informed decision on withdrawal, retrenchment, illness, retirement and so forth. They also need to understand why preservation is necessary,” he says.
According to Aitchison, the main threads through all the new and amended legislation are the protection of members and the protection and delivery of benefits to a broader number of members than is currently the case. Aitchison says retirement reform specifically intends to ensure that as many citizens as possible have an acceptable income after retirement with the broad intention of increasing the national savings rate.
“There is a fiscal need to try and limit the number of pensioners who depend on the national treasury for support. South Africa has one of the lowest rates of savings in the world, and in order to grow South Africa’s financial infrastructure, the government wants to increase the national savings rate via enforced pension preservation,” he explains.
In preparation for the potential enforced preservation, Aitchison urges trustees to implement a default preservation mechanism on their funds. However, he says it is likely that preservation will only apply to future contributions with some kind of run-off mechanism applied to accrued benefits to avoid the panic withdrawal and encashment that occurred during the last discussion of the introduction of preservation.
Aitchison says that because a further paper on retirement reform is set to come out in the next few months, it is not yet possible to say for sure what actual regulatory changes will be introduced. However it seems likely that compulsory preservation, the consolidation of smaller funds into umbrella’s in order to reduce costs, and measures to create an equal playing field or increased competition will feature strongly. Trustees are well advised to start making preparations for these changes now.
