What the new government regulations mean for your retirement fund
Funds will need a clear strategy in each of three areas
Retirement funds will have to establish appropriate, compliant and comprehensive default strategies to:
Ensure that they have a sound default strategy for investing members’ contributions if they don’t specify otherwise,
Afford members the opportunity to preserve their savings when moving between funds, and
Provide an annuity strategy to allow members to seamlessly convert their accumulated savings into a monthly pension when they retire.
Designing a solid default investment strategy
A sound default investment strategy is vital to any fund, because the majority of members won’t be able to make an informed choice and are likely to end up with the default investment. Importantly, the default investment strategy can be differentiated between members based on factors considered suitable by their board of trustees. For this, trustees must set realistic objectives. The nature of a defined contribution fund is that the underlying members have different needs based on their unique circumstances, the age at which they joined the fund and their contribution levels, retirement date and accumulated credit (savings).
Therefore it is important that the strategy takes all this into account by balancing the objectives of the various categories of members and targeting the objectives of the majority of the members. If this is not possible, consideration should be given to differentiating between them based on one or more of these factors. An example of this is a life stage strategy, which differentiates between them based on their time to retirement age.
Making it easy to stay invested when changing jobs
Funds will have to make it easier for members to leave their savings in the fund when they resign from an employer. Funds will also have to allow members to easily transfer their savings to a new fund when they join a new employer. This portability, which will also allow members to consolidate their savings in various retirement funds, will benefit members as it will make it easier to stay invested and hence ensure that they accumulate sufficient assets for retirement.
Funds will have to develop the process for issuing the required paid-up membership certificates.
One of the challenges funds will face will be to find ways to communicate with paid-up members once they have left the fund to avoid an increase in unclaimed benefits. Fund custodians will also have to be conscious of the fact that it will take time to amend their fund rules and processes to incorporate preservation.
Catering for various needs when developing an appropriate annuity strategy
Converting a lump sum into an inflation-adjusted monthly pension to last for the rest of a person’s life is a crucial decision. Funds will need an annuity strategy that caters for members’ individual circumstances, particularly when it comes to sustainability of capital (linked to the investment returns, the level of income drawdown and the pensioner’s longevity). With regard to a fund’s default investment strategy, it will be important to consider their annuity strategy and the investments underlying it to ensure that the pre-retirement investment strategy aligns with the type of annuity they elect at retirement.
For trustees, knowledge and adaptation is key
To ensure that a default strategy delivers the best outcomes for members, fund trustees will have to commit to upskilling themselves – in every aspect of the default regulations and the solutions which they develop for the fund’s members. Since the deadline for compliance is less than a year away – 1 March 2019 – this has to be a priority. Trustees should keep abreast of industry developments and unpack them with the help of their consultants at board, trustee or management committee meetings. Retirement fund custodians must be able to critically evaluate what is required of default regulations and develop and implement the required solutions.
They will also have to monitor and review the solutions on an ongoing basis to ensure that they continue to meet members’ needs. If not, they will have to make changes. With regard to the annuity strategy, it is an evolving space and we expect new solutions and enhancements to be developed over the next few years, which means that trustees will have to remain abreast of developments. Training and upskilling are essential and the fund’s employee benefits consultant or asset consultant can assist with this.
Providing members with assistance and guidance
An essential requirement of the regulations is that funds provide members with access to a retirement benefits counsellor. Although these counsellors won’t provide advice, they will be on hand to explain a fund’s benefits, the features of the various options and the important factors to consider to be able to make an informed choice. Funds may also provide advice at a discounted fee compared to what members might pay in a private capacity. This would require careful monitoring by trustees as such advisers would effectively be ‘endorsed’ by the fund, which means that quality is essential.
Funds should remain good value for money
In keeping with the commitment to serving members’ interests, any fees and charges that result from the provision of these default options must be reasonable and should not in any way be at the expense of good member outcomes.
Fund members need to understand what is happening
Clear, simple and effective member communication regarding the implementation of, or changes to, default solutions is crucial. There is no prescribed format for such communication and trustees will have to decide what will be best suited to their membership.
It’s an opportunity, not a box-ticking exercise
While some might view the new regulations as simply one more thing to comply with, they, in fact, present a great opportunity to improve members’ retirement provision. Simply ticking the boxes on the default regulations before moving on will mean missing the opportunity to add significant value to members and assist them to enjoy a comfortable retirement. It is worth investing time and resources into developing the best possible defaults for the retirement fund.
By Sharon Bosii, Corporate Consultant at Old Mutual Corporate Consultants
For more information, please email Sharon or Andrew Davison, Head of Advice at Old Mutual Corporate Consultants.
DOWNLOAD THE LATEST MINDSPACE MAGAZINE
MiNDSPACE Issue 3