Default regulations – an industry tipping point?
“These final regulations are meant to improve the outcomes for members of retirement funds …” - National Treasury Media Statement, 25 August 2017
“A worthy objective, we can surely all agree. But will this objective be achieved, or will retirement funds simply concentrate their efforts between now and 1 March 2019 on ensuring compliance with the letter of the law but without going that extra mile to yield maximum benefit for ordinary members?”, questioned David Gluckman of Sanlam Employee Benefits.
Rhoderic Nel also of Sanlam Employee Benefits added, “To put this another way, unless retirement outcomes for members are measurably improved as a consequence of changes that must be made within the next 9 months to investments, preservation, retirement benefits counselling and annuitisation, the legislation would not have achieved its objectives. This is about a paradigm shift for the entire retirement funding industry.”
As a litmus test of how well or otherwise the industry is faring, Sanlam conducted an online poll on progress towards the 1 March 2019 implementation deadline amongst retirement funds represented by stakeholders such as trustees and principal officers.
And there were some encouraging findings:
55% of respondents believe the regulations will be extremely effective or very effective in improving retirement outcomes.
69% of respondents believe there will be a large increase in preservation.
39% of respondents believe charges on annuities will decrease.
A separate survey of professional employee benefit consultants produced mixed results. Gluckman’s analysis showed that despite these experts believing that retirement benefits counselling can make a meaningful impact on retirement outcomes if done well, they are skeptical that retirement funds will only concern themselves with doing the bare minimum to comply. Much of this is due to the anticipated approach to the implementation of retirement benefits counselling. According to Gluckman, “There is a large section of fund members who will not receive financial advice because they do not have enough accumulated to be of economic interest to financial advisors. Retirement benefits counselling, if implemented in the spirit of the legislation, provides the most practical means fill that gap and empowers such fund members to make better financial decisions. Done properly, it complements financial advice by addressing a critical gap.”
When considering the requirements for annuities, Nel stated, “The introduction of a trustee endorsed annuity strategy simply means the introduction of another option for retirees to consider. The full range of retail annuity options are still available in addition to the newly introduced range of institutional solutions. This development means that members have more choice. And with the greater spectrum of choice, the need for high quality financial advice at annuitisation is further entrenched.” He continued, “Since the change to a defined contribution framework, the institutional and retail contexts have been blurred. We are all dealing with the financial needs of an individual. What’s happening now is that regulatory, technological and behavioural factors are accelerating the need for solutions that address that individual’s needs via an institutional framework”.
“Neither pure retail or institutional operating environments will or can remain unchanged through this. So the ultimate solution is going to be something new with existing capabilities and products repurposed and we anticipate the introduction of innovations to address the full spectrum of members and their respective needs”, mentioned Gluckman.
His prediction is that these default regulations will prove a tipping point for the retirement funding industry and suspects the industry will look very different in 5 years’ time to what it does today. Gluckman concluded that “Hopefully by then we will have collected measurable evidence that retirement outcomes for members have been improved, or at the very least that the trend is positive. Time will tell”.
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About the Sanlam Benchmark Research
The 2018 Sanlam Benchmark research represents the most iteration of a process that began in 1981. It is a process of engaging retirement funding stakeholders to understand the drivers of better financial outcomes. In doing so, Sanlam conducts South Africa’s most comprehensive retirement funding research, which is freely shared with the public in order to empower better decision making by all concerned stakeholders. Sanlam will present insights from the research at the Sanlam Benchmark events to be held during the course of May 2018.