The regulators of the financial services industry realise that for retirement funds to deliver better outcomes for members, investing in retirement funds and making investment decisions must be as simple as possible. This is the motivation behind the new default regulations for retirement funds, which came into effect on 1 March 2019.
The first of these changes is Regulation 37, which stipulates that all defined-contribution funds must offer at least one default investment portfolio to their members, enabling them to automatically invest in the default portfolio confidently, without having to make difficult investment choices with limited advice.
Regulation 37: What it says
While many funds already have default investment options in place, the new regulations require that boards of trustees demonstrate that they have applied their minds to the composition of these portfolios, ensuring that they are appropriate for their members and their needs.
For funds with only one investment portfolio, that portfolio will become the default and must comply with the regulations. Funds offering portfolio choices must allow members to switch at least once every 12 months.
Boards must consider both active and passive strategies and costs. Pricing must be reasonable and competitive, so low-cost index-tracking products are likely to become increasingly popular, particularly for investing offshore.
Why it’s important
Having a default portfolio does not mean that funds must have one portfolio that suits all members. Appropriate default portfolios may differ between members, based on their age; how long they have until retirement; how much they have saved; and how much they contribute to their retirement fund. Life-stage models, which reduce members’ exposure to risky assets as they near retirement, will probably continue to be popular.
Under the new regulations, boards must also provide regular and clear communication to their members and, at least once a year, provide an update as to the mix of assets in the default portfolios, fees paid, fund performance compared to appropriate benchmarks and what their top 10 holdings are.
New members of retirement funds must be provided with access to free retirement benefits counselling, which will explain the default portfolios. This counselling excludes advice on what to choose but will inform members about their choices.
Boards must regularly review their default portfolios to ensure they deliver on their investment objectives and remain compliant with applicable regulations, vital to ensuring that members truly receive value for money.
Article Posted 11 April 2019 - Sourced from Sygnia Website