Financial advice a game changer in battle for preservation

There is clear evidence that retirement fund members who receive financial advice upon early exits from a fund, make better decisions than their un-advised peers. This fact emerged during the Sanlam Benchmark 2021 presentation, held virtually on 21 June 2021. “Hard data from the Sanlam Umbrella Fund showed that the preservation rate over the past year increased by 5%; we believe [the improvement] is due to proactive retirement benefit counselling,” said Avishal Seeth, Head: Sanlam Umbrella Solutions. The survey, now in its 40th year, goes to market to test the experiences of standalone retirement funds and employers participating in umbrella funds, with the overarching objective of measuring the impact and outcome of South Africa’s retirement fund industry.

Pandemic pandemonium

The Covid-19 pandemic has already had a notable effect on the retirement fund industry and its many stakeholders, including asset managers, financial advisers, retirement funds and retirement fund members. An obvious issue is that the pandemic-linked economic contraction has led to countless job losses as firms restructure or enter business rescue or liquidation proceedings. “One in three standalone funds have experienced some form of reduction in workforce as result of pandemic,” said Rigitte van Zyl, Chief Client Officer at Sanlam Corporate. Employers, meanwhile, indicated that around 80% of retirement fund members had experienced either a reduction in annual increase, reduction in current pay, had sabbaticals without pay or went through retrenchments. 

Many retirement fund responded by offering contribution holidays, with 27% of retirement funds and 41% of umbrella funds indicating that they had temporarily suspended savings contributions during 2020. The average period of these suspensions was 4.5 months, though some industries indicated that they may extend the period to 12 months or longer. “The latest statistics indicate that 8.5% of the members of our umbrella fund are still suspended for retirement savings, a marked improvement from August 2020, where nearly a quarter of the membership was suspended,” said Van Zyl. 

Consolidation trend could renew, soon

Figures from the Financial Sector Conduct Authority (FSCA) show approximately 1500 active standalone retirement funds locally, down from more than 16000 funds in the early 1990s. The Sanlam Benchmark 2021 suggests there will be renewed interest among the remaining standalone funds to migrate to the more cost effective umbrella fund structure. “We expect consolidation to accelerate over next few years as businesses refocus on their core business activities,” said Seeth. Employers see umbrella funds as a more sustainable alternative due to lower costs; reduced governance requirements; and the lack of internal resource to manage retirement funds, among other factors. An umbrella fund also addresses concerns over trustee personal liability. 

National Treasury has been consistent in its call for fewer standalone funds locally, with a 2018 suggestion that fewer than 200 funds would suffice. More recently, Ismail Momoniat, Treasury’s head of tax and financial sector policy, during an address to the Pension Lawyers’ Association, agreed that there were too many registered active retirement funds in South Africa, though it was unclear what the optimal market size should be. 

Contribution rates in unfortunate decline

The contribution suspensions that blighted 2020 and 2021 have undone the improved contribution trend that played out between 2014 and 2019. “We want to see improvement in contributions to retirement savings; but unfortunately the pandemic put paid to the trend,” said Seeth. He added that the decision was “the right option” as it was more important to ensure livelihoods during lockdown and that a few month’ suspension would not have significantly adverse on retirement outcomes over the long term. Of far greater concern is that retirement fund members are appropriately advised when making important decisions such as existing a fund, halting contributions or choosing options within the fund. 

Financial advice has become a contentious issue in the retirement fund space and it remains difficult for employers and funds to ensure that every member receives advice at critical junctures in their retirement savings journeys. The regulators have done their part by, for example, introducing default regulations which are aimed at “improving the outcomes of members of retirement funds”. According to Seeth, these regulations minimise the risk to members by ensuring that retirement funds offer default investment, preservation and annuitisation strategies. “The glue that holds all of this together is effective benefits counselling,” he said “Without this, the default regulations will not be optimal”. 

Perception versus reality in the default world

Benchmark 2021 dedicated a few questions to both employers’ and standalone funds’ perceptions of whether defaults had improved member behaviours insofar annuitisation and preservation. 57% of standalone funds said that they had not seen an improvement in member preservation and 49% said there had been no improvement in annuitisation at retirement either. “There was a strong acknowledgment from standalone funds that they were not doing enough when it came to engaging with members from a retirement benefit consulting, communication and education perspective,” concluded Seeth. 

The good news is that the more than two thirds of respondents indicated an increase in the utilisation by members of retirement benefits counselling. It also emerged that 54% of standalone funds and 70% of employers participating in umbrella funds had a formalised strategy for rendering financial advice to active members. Darryl Moodley, Head: Tailored Investments at Sanlam Corporate, also weighed in on financial advice in meeting holistic member needs. “One of the main building blocks for generating better retirement outcomes has been the advice and counselling offering,” he said, before lamenting the significant cohort of funds without formalised advice strategies in place. 

Sanlam Corporate’s internal data confirmed Seeth’s opening observation about the positive impact of benefit counselling on preservation. According to Moodley, the proportion of members taking cash upon exiting is lower with counselling than without. The message to financial advisers and retirement funds is clear. There are countless opportunities to offer holistic financial advice to retirement fund members… Your job is to work with the retirement fund industry to ensure that no retirement fund member is left un-advised at a critical juncture along their savings journey. 

Writer’s thoughts:
I appreciate that benefits counselling was never intended as a replacement for holistic financial advice. It also unlikely that the existing financial advice profession has the capacity to step in and provide holistic advice to all retirement savers. But there can be nothing wrong with the dream of a retirement industry where every person, rich or poor, benefits from excellent advice. How would you construct a financial advice solution to reach every retirement saver, countrywide? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].