Johan Kriek, Founder of Quantum Leap

South Africa has a strange relationship with living annuities.

They are widely used, widely criticised and often treated as evidence of what is wrong with the retirement system. The criticism is familiar: members draw too much, invest too conservatively or too aggressively, underestimate how long they may live, react badly to market falls, and risk running out of money in old age.

Those risks are real. But they do not make the living annuity itself the problem.

The problem is ungoverned drawdown.

A living annuity is simply a flexible retirement-income vehicle. It allows a retiree to keep assets invested, draw an income, adjust that income over time, and preserve capital where possible. In a country like South Africa, where retirement circumstances differ enormously across members, that flexibility has real value.

Some retirees need to support dependants. Some carry debt into retirement. Some have irregular expenses. Some have other sources of income. Some want to preserve a bequest. Some need higher income early in retirement and lower income later. Some may still work part-time. Some may be willing to accept more investment risk; others may not.

A compulsory one-size-fits-all annuity answer cannot reflect all of that complexity.

The case for living annuities is therefore not weak. It is strong. But only if the flexibility is governed.

Flexibility without governance is not a pension

The problem with many living annuities is not that they are flexible. It is that the flexibility is often unmanaged.

A member retires. A drawdown rate is selected. An investment portfolio is chosen. The income is reviewed once a year, often with limited context. The member may or may not receive advice. The provider may show the account value and investment performance. But there may be no clear ongoing assessment of whether the income remains sustainable.

That is the missing pension-like discipline.

In a defined benefit pension, sustainability is not left to the pensioner. The scheme is valued. Assumptions are tested. Funding is monitored. Risks are reported. Decisions are documented. Trustees, actuaries and administrators operate within a governance framework.

In many living annuities, by contrast, the retiree carries the risk, but often without the same governance structure around the income being drawn.

That is not a failure of the living annuity as a vehicle. It is a failure to govern the vehicle as retirement income.

Annual drawdown elections are not enough

A common response is that members already choose their drawdown rate each year, often within regulated limits. But an annual drawdown election is not the same as sustainability governance.

A member may know that they are drawing 7.5% a year. That does not mean they know whether 7.5% is sustainable given their age, investment strategy, market conditions, inflation, fees and desired income path.

A member may know that their portfolio has fallen by 10%. That does not mean they know whether their income plan has become unaffordable.

A member may know that they can reduce income. That does not mean they know when a reduction is necessary, how large it should be, or what the trade-off is between current income and future income security.

An annual drawdown election asks members to choose a percentage. Sustainability governance asks whether that percentage can reasonably be supported over time, under realistic assumptions about markets, inflation, fees, longevity and member behaviour.

That requires measurement.

Advice helps, but cannot carry the whole system

Financial advice has an important role. For members with access to good ongoing advice, a living annuity can be managed carefully and adjusted over time.

But it is unrealistic to build the retirement system on the assumption that all members will receive, understand and act on ongoing retirement-income advice.

Many members will not access advice. Some cannot afford it. Some will disengage. Some will make decisions only at retirement and then drift. Others will rely on family, employers, call centres, product brochures or annual statements. Even where advice is available, the quality and consistency of sustainability monitoring may vary.

That is why default strategies and governance frameworks matter.

If the system knows that many members will not be fully engaged, blaming members for not engaging is not enough. Retirement-income arrangements need to work better for real members in real circumstances.

This is where South Africa’s Regulation 39 architecture matters. Funds are already required to have annuity strategies. The next step is to ensure that those strategies are not merely documented, but genuinely governed, monitored and tested against member outcomes.

The right comparison is not living annuity versus guaranteed annuity

The South African debate is often framed as a choice between living annuities and guaranteed life annuities.

That framing is too narrow.

Guaranteed annuities have important strengths. They provide income certainty, remove investment risk from the pensioner and protect against outliving one’s assets. For some retirees, that certainty is exactly what is needed.

But guaranteed annuities also involve trade-offs. They reduce flexibility. They may offer limited access to capital. They may not suit members with uncertain family needs, poor health, bequest motives, debt, irregular expenditure or changing circumstances.

Living annuities sit on the other side of the trade-off. They preserve flexibility, but expose the retiree to investment, inflation, sequencing and longevity risk.

The more useful distinction is not between good and bad products, but between risks that are governed and risks that are simply handed to the retiree.

A poorly governed living annuity can fail badly. But a poorly designed default annuity strategy can also fail members if it is not used, not understood, or not aligned with how members actually retire.

The more useful distinction is governed retirement income versus ungoverned retirement income.

A governed living annuity can set income prudently, monitor sustainability, flag emerging risk, support timely interventions and preserve flexibility for members who need it.

An ungoverned living annuity leaves members to navigate one of the most complex financial decisions of their lives with too little structure.

The default annuity strategy opportunity

This is where South Africa’s default annuity strategy framework becomes so important.

Properly designed, a default annuity strategy should not be a narrow compliance document. It should be the fund’s practical answer for members who need retirement income but do not have the advice, confidence or expertise to design a sustainable strategy for themselves.

That cannot be answered by product selection alone.

A default annuity strategy should set out how members are supported into retirement, how suitable income options are identified, how risks are explained, how income sustainability is monitored and how members are alerted when their chosen income appears at risk of becoming unsustainable.

In that context, a governed living annuity could be a powerful default retirement-income option.

It preserves flexibility. It allows members to retain exposure to growth assets. It can accommodate changing income needs. It can preserve a potential bequest. It can allow later-life annuitisation where appropriate. And, if properly governed, it can be managed around the central objective that matters most in retirement: sustaining income for life.

That is a very different proposition from an unmonitored living annuity.

The missing ingredient is governance.

The draft conduct standard on living annuities points in the right direction because it recognises that drawdown cannot be treated as a once-off product sale. Income levels, investment strategy, sustainability, charges, communication and ongoing review all matter.

If those principles are properly embedded into default annuity strategies, South Africa does not need to choose between flexibility and governance. It can build a retirement-income framework that preserves the strengths of living annuities while addressing their greatest weakness.

The result would be closer to a living pension: flexible, invested, monitored, adjustable and governed with the member’s lifetime income in mind.

Turning living annuities into living pensions

The phrase “living annuity” may itself be part of the problem. It sounds like a product. It is usually administered like a product. It is often reported like an investment account.

But for the retiree, it is not just an investment account. It is supposed to fund daily life.

That means it should be governed more like a pension.

A living pension framework would not remove flexibility. It would organise it.

It would ask, at outset:

• What income is affordable?
• What investment strategy supports that income?
• What is the risk of depletion?
• How sensitive is the plan to market falls, inflation and withdrawals?
• What income path is being targeted?
• What residual capital may remain under different scenarios?

It would then monitor, over time:

• whether income remains sustainable;
• whether the funding position has improved or deteriorated;
• whether the expected run-out age has moved;
• whether the member is drawing too much;
• whether the investment strategy remains appropriate;
• whether intervention is required.

And it would document decisions:

• what was measured;
• what was communicated;
• what action was recommended;
• what the member chose;
• what changed as a result.

That is the difference between a product and a governed retirement-income process.

The member should not have to interpret the risk alone

One of the weaknesses of the current model is that members are often shown information that is technically correct but behaviourally unhelpful.

A statement may show the account value. It may show investment performance. It may show the drawdown rate. But it may not translate those facts into retirement-income meaning.

If a member’s capital falls from R1 million to R850,000, what should they conclude?

Have they failed? Should they move to cash? Should they cut income? Should they stay invested? Is the plan still on track? Has the probability of running out of money changed materially? Has the income become unsustainable, or is the fall within the range already allowed for?

Without an income-sustainability frame, members may react to market movements in ways that damage their own outcomes.

A balance tells the retiree what is left. It does not tell them whether their income plan is still on track. That translation is the missing governance layer.

The governance test

For trustees, providers and regulators, the test should be practical.

If a fund offers or facilitates living annuities, can it answer the following questions?

• Are members drawing sustainable income?
• Which members are at risk of running out of money?
• How is that risk measured?
• How often is it monitored?
• What communication is sent when income appears unsustainable?
• What actions are available?
• How are decisions documented?
• How does the fund know whether its annuity strategy is working?

If the answer is unclear, then the issue is not the existence of living annuities. The issue is the absence of proper retirement-income governance.

This also changes how low take-up of default annuity strategies should be interpreted.

Low take-up should not automatically be dismissed as member apathy. It may be a governance signal. It may suggest that the strategy is not understood, not trusted, not attractive, or not aligned with the flexibility members value.

A member-centric retirement framework should not simply make an option available and then assume the job is done. It should ask whether the option is being used, why members are or are not using it, and whether the strategy is delivering better retirement outcomes in practice.

That is where accountability becomes real.

Conclusion

South Africa does not need to abandon living annuities to improve retirement outcomes.

It needs to stop treating them as self-managing products.

The living annuity can remain a valuable part of the retirement system. More than that, if embedded properly within default annuity strategies and supported by the principles in the draft conduct standard, it could become a genuinely compelling retirement-income default: flexible, invested, capable of preserving a bequest, responsive to changing member needs and governed around lifetime income sustainability.

But that requires a shift in mindset.

A living annuity should not be judged only by whether the member selected a drawdown rate within the permitted range. It should be judged by whether the income is sustainable, whether risks are being monitored, whether members are alerted when action is needed and whether trustees and providers can evidence that the strategy is working in practice.

Drawdown is not the problem.

Drawdown left to run without governance is.

And the reform opportunity is clear: turn living annuities into living pensions.

ENDS