Steps approved to action Retirement Fund Reform

Sara Herbert, Head of Investment Consulting at Old Mutual Corporate Consultants.

The next significant step in Government’s reformation of the retirement fund industry was taken last week (25 August 2017) and will see the implementation of the final retirement funds default regulations on 1 September 2017. Existing funds, however, have until 1 March 2019 to comply.

Sara Herbert, Head of Investment Consulting at Old Mutual Corporate Consultants, says that these regulations are another step towards achieving the objective of Retirement Fund Reform, which is to improve the retirement outcomes of retirement fund members.

Individuals are flooded with choices before and at retirement, and many are ill-prepared to make informed decisions, says Herbert. “These defaults regulations are aimed at helping members make the right decision by implementing appropriate automatic choices for retirement fund members who don’t want to or fail to make their own selection.”

Herbert says Old Mutual’s research supports the need for such retirement reforms. “Our 2017 Old Mutual Corporate Retirement Monitor showed that 61% of retirement fund members actively chose the default portfolio as they did not feel confident about making an alternative choice, or they trusted it was appropriate. Even when member choice was provided within funds, only 8% changed their investment choice in the last three years.

“This demonstrates the significant impact default and pension decisions have on members’ ultimate retirement benefits. It is therefore important for trustees to make such default decisions with care and consideration.”

The new regulations require all retirement funds to adopt a set of default options for fund members in terms of investments, preservation and pensions at retirement.

“Historically defaults have been focused on investment choices, but this legislation expands the application of defaults into the area of preservation. The pensions at retirement component of the default regulations are not defaults per se, but rather trustee endorsed annuities that retiring members will need to opt into.

“The regulations also offer guidance to fund trustees on their roles and responsibilities regarding these default selections. These responsibilities include ensuring they are easy to access, and providing counselling to guide members’ decisions.”

Herbert concludes: “If correctly implemented, these regulations should help improve the retirement outcomes of many members by ensuring that their fund’s defaults are appropriate, competitive and well communicated to members.”