Retirement counselling - can it really make a difference?
The Default Regulations which became effective on 1 March 2019 have brought the importance of retirement counselling to the fore, which is a step in the right direction. Far too many members of retirement funds do not fully understand the options available to them, nor the long-term implications of the choices they make, specifically at retirement. Retirement counselling, as per the Default Regulations, is intended to fill this gap.
Retirement counselling is described as follows in the Default Regulations:
“retirement benefits counselling means the disclosure and explanation, in clear and understandable language, including risks, costs and charges, of:
the available investment portfolios;
the terms of the fund’s annuity strategy;
the terms and process by which a fund, including a member’s new fund, handles preserved benefits in terms of regulation 38 (default preservation and portability); and
any other options available to members.”
As much as the Default Regulations stipulate that counselling must be provided, it does not prescribe the “how”. This begs the question whether written communication to members on its own would suffice or should funds do more, and if they do, will it drive the right behavior by members? Will the appointment of a retirement counsellor have an impact on a member’s long-term outcome, especially if one considers the fact that the appointment of a retirement counsellor most likely comes at an additional cost to the fund or the member?
Normally one would look at industry experience to answer these questions. However, given that retirement counselling is a relatively new concept in the South African industry, it is difficult to find extensive comparative figures on the impact of retirement counselling.
In a case study conducted by ACA Employee Benefits (ACA) we looked at various funds which implemented elements of the Default Regulations prior to the effective date. We identified one fund which had pro‑actively implemented a formal annuity strategy coupled with retirement counselling in 2015 and used the experience of this Fund to illustrate the impact of retirement counselling on member choices. For purposes of this article, the fund will be referred to as Fund X.
Fund X has a membership base of >30 000 active members and >9 000 pensioners, with assets of >R25bn. Fund X conducted an annuity strategy review in 2015 in anticipation of the Default Regulations. Given the demographics of the membership of Fund X, the Board of Management was of the view that the in-fund life annuity remained the best suited option for the bulk of the members. In addition, members retained the right, separate to the annuity strategy, to retire on an in-fund living annuity basis or to purchase a life/living annuity from an external provider. (The in-fund living annuity option was retained as the Board of Management was of the opinion that a living annuity, although not part of the formal annuity strategy of the Fund, remained suitable for a specific class of member and from a cost perspective it was beneficial to members to offer this on an in-fund basis.)
Although the considered opinion was that a life annuity was best suited for the bulk of the members, and irrespective of the fact that proper written communication was provided to members at retirement, past experience of Fund X was that 60% to 70% of retiring members elected to retire on a living annuity basis.
Fund experience was that members who selected a living annuity did so without properly understanding the risks and how to manage these, resulting in their savings being prematurely depleted during their lifetime. Further analyses revealed that 35% of the in-fund living annuitants were on a drawdown rate of 10% and higher.
When conducting a thorough investigation on the in-fund living annuitants, the following statistics were revealed:
High drawdown rates further coupled with possible low market returns and the impact on the financial sustainability were a concern, especially given the likelihood that most of these living annuitants did not have other sources of income.
As a result, the board of management of Fund X appointed a retirement counsellor (on a salaried basis as to remove any commission incentives) in November 2015 with the specific task to contact and discuss the retirement options (life as well as living annuity) with each retiring member at least three months prior to retirement.
The aim of the appointment was not to guide members to a certain solution, but to provide them with adequate information to ensure that each retiring member is provided with an understanding of the risks and benefits of the options available to them and to assist them to make an informed decision.
In the case study, ACA compared the choices made by members prior to and after the appointment of the retirement counsellor. As illustrated in the table below, the impact of the formal annuity strategy coupled with a competent retirement counsellor is noticeable immediately:
For quarter 1 of 2019, the trend is similar, with a 73% preference for the in-fund life annuity.
It is however important to also gauge whether the flow of assets towards life/living annuity in Fund X, as well as external, is in line with what is to be expected when a member makes an informed decision. It is industry consensus that living annuities are better suited for members with higher fund credits, and as such many living annuity products now prescribe a minimum amount.
As such, ACA has also tracked this movement for 35 months since implementation of the strategy:
On average members with low fund credits chose a life annuity rather than a living annuity since 2016, whereas the converse was true between 2013 and 2015. Since 2015, the majority of members purchased life annuities within Fund X whereas members who purchased annuities (mostly living annuities) outside of the Fund were generally higher earners who have their own financial advisors and probably consolidated their savings.
This proven positive impact on a member’s financial outcome by providing counselling shortly before retirement should be very encouraging to boards of management. A pro-active approach could ensure that better retirement outcomes are achieved and is more likely to provide members with peace of mind during the retirement process, i.e. obtaining quotations in advance, assisting members with the end-to-end process and ensure that members feel in control. This contributes to the likelihood that members will have the opportunity to make informed decisions at retirement. Moreover, the potential to positively impact the outcome for a member if counselling is applied during their working life is exiting.
When positioned correctly, retirement counselling is an effective and powerful tool for boards of management to empower their members when it comes to their retirement benefits.