Unpacking the new Default Regulations
Turning retirement capital into income is one of the most complex financial decisions one is likely to make. The range of annuity products on the market and the different features and cost structures offered can be tricky for anyone.
Regulation 39 for retirement funds aims to make such decisions much easier for members. As of 1 March this year, all defined contribution pension, pension preservation and retirement annuity funds, as well as provident funds that allow members to elect an annuity, must offer a pre-selected “default” annuity strategy.
Under the new regulation, every fund must offer a recommended annuity, to be payable without taking money out of the fund or to be offered by an external annuity provider. The intention is to guide members towards better long-term outcomes by providing a pre-approved and well-considered strategy that is simple to understand.
Regulation 39: What it says
Of all the new regulations coming into effect, this is likely to place the greatest degree of responsibility on boards of trustees, as, to date, they have not had to consider members’ needs after retirement. Until this point, their focus has been entirely on members’ interests up to the point of retirement. After retirement, members were left to their own devices.
As of 1 March, trustees must determine an annuity strategy that considers: the level of income to be paid to pensioners; how much income protection should be provided to their beneficiaries when they pass away; investment risks; inflation risks; and the risk of pensioners outliving their capital. They must also ensure that fees and charges are competitive and transparent.
Trustees can use either living annuities, linked to a portfolio of underlying investments, or life annuities, which are guaranteed by an insurer for life. Benefits may be paid directly from the fund or by an external provider.
If a living annuity strategy is chosen, pensioners can be offered up to four investment portfolios and must be able to switch between them. Proposed limits on how much of their savings can be withdrawn each year are expected to be prescribed soon, and trustees must monitor the sustainability of those drawdowns.
Why it’s important
The annuity strategies offered by retirement funds will be “soft defaults”: members will be required to opt in rather than opt out. Trustees will therefore offer recommendations rather than one-size-fits-all solutions. Nonetheless, this will be a benefit for many members.
In order to assist members in making informed decisions, funds must also provide access to free retirement benefits counselling three to six months before a member’s retirement date. This counselling is not a substitute for personalised financial advice, but it must provide clear and easily understandable information on available retirement choices.
Given the complexity of many retirement choices, members who are not comfortable making their own selection will find comfort knowing they can opt for the solution deemed most appropriate by the trustees. This should guide more members towards sustainable solutions that reduce the risk of them outliving their savings.
Article Posted 11 April 2019 - Sourced from Sygnia Website