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Caution…Default Regulations ahead

04 December 2018Jonathan Faurie

Next year will be a big year for the South African retirement industry as retirement funds have until 1 March 2019 to comply with the default regulations which have been introduced in the industry. But is the industry prepared for the level of compliance that will be required of them from industry regulators? This was a topic that was recently discussed at a roundtable hosted by Sanlam EB.

A matter of confusion

While there are a lot of pension funds that are putting systems in place to comply with the new Default Regulations, there are some pension funds who are dragging their feet and will be cutting it fine when it comes to compliance. 

“My feeling is that Boards of Trustees were just overwhelmed when it comes to the default options part of the Default Regulations,” said Barend la Grange, Head of Individual Member Support at Sanlam EB. “This is something new and not what they would have had to consider in the past. The Draft Criteria for Living Annuities that was issued by the Financial Sector Conduct Authority (FSCA) in November has shed even more uncertainty in the industry regarding drawdown rates which in our view might not be implementable as is,” said La Grange. 

The problem seems to be related to Regulation 39 of the Draft Criteria which relates to clients who have living annuities as part of their default annuity strategy. Within the regulation there are tables that split individuals according to specific criteria such as age, gender and marital status. This individualisation will be used to calculate a sustainable income for that individual and that sustainable income will govern the drawdown rate. 

“It is this confusion that needs to be clarified with the FSCA,” said La Grange. 

Ticking boxes

One of the real dangers that the industry faces is that trustees may very well fall into a tick box approach when it comes to compliance with the new regulation. 

“A lot of the Draft Regulation is open to interpretation and trustees have underestimated the amount of work that is involved when it comes to implementation, so there will be a rush. The industry is aware that the FSCA wants to move away from a tick box approach to compliance, but when the backs of trustees are up against the wall and there is only one meeting between now and 1 March 2019, there is the temptation to fall into the tick box approach and then rectify it later,” said David Gluckman, Head of Special Projects at Sanlam EB.  

There are significant concerns on the part of trustees that they will be held personally liable if something goes wrong, so tick box may be the order of the day. 

Lack of knowledge and understanding

Another problem that we need to take into consideration is that there is a fundamental lack of knowledge and understanding when it comes to compliance with the new regulation. 

“What we are seeing is that trustees are battling with basic fundamentals such as the difference between a living annuity and a life annuity and the nuances associated with these products. And they will have to make a recommendation on these products under the new regulations. So there needs to be a bit of product training regarding this on the part of insurers who are offering these products,” said Viresh Maharaj, Chief Executive of Sanlam Corporate Sales and Marketing. 

“I think that one of the biggest reasons why trustees have postponed the implementation of the new Default Regulations is that they don’t understand post retirement risk as well as they understand pre-retirement risk. During the accumulation phase, an investor is exposed to certain risks, which change once they retire. The biggest of these is  longevity risk. There needs to be engagement on the post retirement risk issue,” said La Grange. 

While these are pertinent challenges, Maharaj pointed out that the industry needs to remain positive and have one eye on the objective of the Default Regulations, which is to put pensioners into a broader spectrum of annuities which would ultimately benefit them and help them retire comfortably.  

Taking centre stage

Advice will take centre stage under the new Default Regulations. 

Not only will pre-retirement advice be regulated in a stricter manner, but post retirement advice will also be provided to retirees. Whether this takes the form of a letter, or advise from an adviser, or a trained call centre consult remains to be seen and will differ from insurer to insurer. 

It will be interesting to see how this develops. At the 2018 IFA Symposium, South Africa’s cultural diversity was highlighted. It was pointed out that because South Africa is so diverse, it is hard to establish a standardised advice model that will suit the industry.

This is a challenge that could potentially face the post retirement space. However, Maharaj pointed out that there is plenty of opportunity in this diversity. 

“The fact that the country is so diverse is a good thing because it forces the retirement industry (pre and post retirement) to become more resilient. It forces advise models to change, which can only benefit clients. Yes, advice needs to be standardised to a certain degree. However, there needs to be a close enough fit between advice and the client’s individual needs,” said Maharaj. 

Editor’s Thoughts:
The FSCA has worked tirelessly to create an industry where financial services providers do not follow a tick box approach when it comes to the products and services that are offered to clients. The fact that there are already concerns regarding a tick box approach when it comes to the Default Regulations is worrying. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Heinz, 05 Dec 2018
Regulation to protect the genral public is good...UNLESS the effect of regulation is that the general public will not be able to access advisers due to advisers not being able to have the general public as a client due to costs and thus only service to top 3%. Case in point: Look at the decline in advisers that are registered to give advice on medical aids...the commission structure was changed drastically to the point that it almost makes no sense to actually advise on this...the effect? The general public do not get the proper advice they should and are left to the advise of the product providers themselves (rarely a good thing)...REGULATION should be regulated !?!
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Added by GAVIN CAME, 04 Dec 2018
We have as an industry created a shambles. We have elevated the compliance requirements for advice that it is now inaccessible to pensioners. We now say that advice in not necessary in a pre-retirement environment and the very people that need advice will now be subjected to a default solution. The decision whether to invest in a fixed income annuity or a living annuity is fraught with complications and an incorrect decision can literally live with a pensioner for life. This critical advice point is now being taken out of the hands of professional advisers and placed before either an ill-equipped board of trustees who will apply a on-size fits all solution or an employee of a large administrator who will be hard pressed to offer a truly un-conflicted solution.
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