The recent amendments to the Pensions Fund Act have brought the importance of retirement benefits counselling to the fore and Jaco Pretorius, CEO of Ensimini Financial Services, says this is a step in the right direction. “For some time now we have been advocating that more needs to be done to improve access to information and financial services and to enhance the level of transparency in the retirement savings industry. While it has been easy for the retirement savings industry to blame consumer apathy for poor consumer decisions, it is often more likely the result of lack of access to relevant and unbiased information,” he says.
The amendments stipulate that funds are required to ensure that members have access to retirement benefits counselling before they make any decisions. No money can be transferred or withdrawn unless this has been done. “The reality is that far too many members of retirement funds do not fully understand the long-term implications of the options available to them when they exit a retirement fund,” says Pretorius. He adds that this is particularly evident when considering the statistics sourced from a number of retirement funds administered by its retirement fund administration company, Ensimini Administration Services.
“Statistics reflect that a staggering 97% of members that withdraw prior to retirement elect to take their accumulated benefit as a lump sum without fully appreciating the long-term impact on their retirement savings. I would love to say that these members preserve their post-tax withdrawal benefit for retirement, but we do not believe that this is the case.”
In many instances, he says, this behaviour is a function of the individual’s economic circumstances at the time of exit, but it is often as a result of a lack of access to appropriate counselling or advice. “What’s even more worrying is that 95% of members that retire from provident funds elect to take the full amount available to them as a lump sum, irrespective of the Income Tax implications.”
He believes that it is this behaviour by retirement fund members that is the leading cause for more than 90% of South Africans being unable to achieve true financial independence in retirement.
“Unfortunately, the vast majority of members of South African retirement funds do not have access to proper financial advice, as the current financial advisory framework is driven by large product providers and their remuneration structures are heavily tilted towards commission-based sales.
It is therefore unsurprising that lower income earners and members with relatively low savings are unappealing as clients to commission-earning advisors.”
Whilst the introduction of a retirement benefits counselling service to fund members may have an impact on underlying costs, says Pretorius, it has the potential to improve the optimisation of retirement savings in the long term, by reducing the leakage of members’ retirement savings that result from uninformed decision making.
Retirement benefits counselling is an entirely new concept. Interestingly the legislation doesn’t specify exactly what it should entail. The Act says it is the “disclosure and explanation, in clear and understandable language” of the risks and costs of the options the member has. How this might be done, however, remains open to interpretation. “This poses a challenge for retirement funds trustees, especially in the new principle-based regulatory environment we are moving into,” says Pretorius.
“It is however important to appreciate that the regulations do not aim to be prescriptive to the members of retirement funds but are aimed at ‘improving retirement outcomes’. This is after all one of the key responsibilities of trustees of retirement funds – “to ensure that the interests of members ... are protected at all times” (Section 7C(2)(a) of the Pension Funds Act. The format and content of retirement benefits counselling will evolve over time. Our main concern is that this should remain independent of any product provider.”
So should there be a more standardised approach to the counselling? Pretorius says much of the compliance in the retirement savings industry is tick-box based. “We have doubts as to whether standardised counselling will deliver better retirement outcomes. Trustees should rather focus on improving access to information, ensuring service providers are fully transparent regarding fees and investment returns and making available a resource to members to help them better appreciate the impact of their decisions on their potential retirement outcome.”
He adds, as with any new regulations introduced, some service providers will undoubtedly see this counselling as a new revenue line and “are probably already hard at work justifying fee increases to add this service as part of their existing offering.”
Pretorius stresses that the goal of this new counselling needs to be focussed on optimisation of the members of the funds’ retirement savings journey and achieve the aim of better retirement outcomes. “While it is not unreasonable to charge for such a service, trustees have a responsibility of ensuring that any added costs achieve the better retirement outcomes. It is important to remember that the introduction of retirement benefits counselling is part of the Default Regulations that all retirement funds must introduce by 28 February 2019. Other components that trustees must have in place include default strategies for preserving benefits upon withdrawal, default investment strategies as well as annuity options to be made available.”
“We welcome these necessary changes and look forward to fund members making better decisions in the future,” he concludes.