Envisioning the future
25 May, 2023

Belinda Sullivan – Head of Corporate Consulting Strategy at Alexforbes

 

If Heraclitus coined the phrase “the only constant is change” in 500 BC, one can only imagine what he would be saying today. But in a world of ongoing uncertainty and change at a pace that is difficult to comprehend in reality, it is hard to imagine what the future holds in six months, let alone in say twenty years. What if we did nothing and “rolled with the punches” so to speak? The learnings from the last three years have taught us to expect and be ready for anything.

 

Future-proofing retirement funds

 

Megatrends – like pandemics and artificial intelligence – are shaping our future and are likely to drive change at pace. Corporate failure rates are closely linked to the rate of disruptive change, which then has a ripple effect on employees, their retirement savings, their families and the communities at large. While it is, inevitably, easy to think of self-preservation in the moment, we do need to consider how we future-proof retirement funds, and what legacy we leave future generations. What we do now has a great impact in guiding future generations, uplifting communities, alleviating poverty, ensuring gender equality and preserving natural resources to name but a few examples.

 

Retirement funds play a significant role in facilitating the investment and growth of retirement savings over the lifetime of a member. By pooling individuals’ savings in a retirement fund, financial inclusion is provided at scale and those savings can be mobilised to ensure sustainable long-term returns for members whilst making a positive real-world impact. In order to make this a reality, it is important for employers, service providers and fund members to become future-fit.

 

Investment styles and ESG factors

 

Setting a broader sustainability commitment means that we need to consider how fund benefits are designed and structured. In particular, the investment strategy of a fund should be structured to deliver a reasonable income to members in retirement, whilst making a real-world impact along the way. Members should also be supported throughout their lifetime to make good decisions to ensure a sustainable income.

By incorporating environmental, social and governance aspects into a fund’s investment strategy in the right way, an improved risk and return profile can be achieved, whilst at the same time making a positive real-world impact. This does not mean sacrificing returns – rather it is about ensuring sufficient returns are achieved and that these are achieved in a responsible manner.

 

Based on the above, we believe that asset owners play an essential role in creating a sustainable and resilient fund.

 

Retirement reforms

 

In considering sustainability, we cannot ignore the South African retirement landscape and the extensive legislative and regulatory framework, which has resulted in increased governance and compliance requirements. Key themes in the SA landscape include the migration from defined benefit to defined contribution, shifting the liability of member outcomes from the employer to the member.

 

More recently, significant changes to the defined contribution environment have focused on improving member outcomes. Retirement reforms from 2016 onwards have promoted harmonisation, consolidation, simplification and shifting the focus from the needs of the average member to the individual experience and personal circumstances, underpinned by TCF (treating customers fairly).

 

The expectation is that the last piece of this puzzle will be the introduction of the proposed two-pot system on 1 March 2024. With the added complexity, increasing governance requirements and the expectation of the regulator to continue to further encourage the reduction in the number of overall retirement funds, we have seen a shift to:

 

  • finding more simplistic solutions to ensure members are engaged and empowered to make good decisions
  • more standalone administered funds converting to umbrella funds so that experienced individuals can take on the required regulatory commitment

 

It’s all about the member

 

The emphasis is a more strategic focus to improve members’ outcomes. Reforms are also driving harmonisation between different types of retirement funds – tax treatment and access to savings will be the same across all funds. Harmonisation efforts help to simplify the retirement landscape into the future.

 

Envision the fund and the future outcomes you want to provide to your members – consider how you connect the design to the envisaged outcomes and ultimately how you elect the appropriate team to work with you to deliver YOUR fund of the future.

 

ENDS

 

Author

@Belinda Sullivan
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