I write this article with less than 10 days to go before the law requires that every South African retirement fund must make available a trustee-endorsed annuity strategy for its retiring members.
Yet there is great uncertainty in the retirement funds industry how this will play out …
During November 2018, the FSCA issued a draft conduct standard pertaining to all living annuities used in terms of such trustee-endorsed annuity strategies. Comments were requested by 14 January 2019, and now we all await the next steps.
Key principles that the FSCA wishes to enforce for living annuity strategies include:
Suitable for the average member who does not have the expertise to make choices.
Ensure greater protection from risks such as poor investment returns and excessive fees.
Sustainability is a priority.
Greater monitoring and communication onus placed on Trustees.
Maximum drawdown rates are specified by age and gender as set out in the table below.
The FSCA’s emphasis on sustainability above all other factors is laudable and noble, but the question remains will such regulation work and result in a significant change in annuity purchase behaviour upon retirement?
Clearly the FSCA is concerned that far too many retirees are purchasing living annuities for the wrong reasons as evidenced in the table below based on ASISA new business statistics for 2016:
The table shows that approximately 80% of retirees (and more than 90% of investment amounts) are being invested in living annuities. These are the annuity vehicle of choice of retiring South Africans.
And indeed the ASISA numbers also indicate that the FSCA are correct to be concerned about the sustainability of living annuities.
But I can’t help wondering if the FSCA are correct to focus to such a degree on sustainability of income. The root problem appears to be that South Africans simply have not saved anywhere near enough at point of retirement. No annuity structure can solve that problem. South African retirees are hence compelled to make trade-offs both at point of retirement and thereafter.
My fear is that the unintended consequences of overly restrictive trustee-endorsed annuity strategies, along with placing too great a burden on trustees, are likely to be:
Very few members will opt into these strategies.
Trustees will look to mitigate their risks by focussing on tick-box compliance.
Behaviours and choices at retirement will continue as before.
The cost will exceed the net benefit to members.
By the time you read this article the default regulations will already be in effect, and we should know if any tweaks were made to the draft conduct standard!