Defaulting our way to prosperity in retirement

Being dubbed the Default Regulations probably condemned the new retirement rules that came into effect on 1 March 2019 into relative obscurity – the name hardly inspires interest.

Also, given the level of indebtedness of South Africans, it was probably misconstrued to refer to legislation allied to the National Credit Act.

However, these seemingly irrelevant regulations have the potential to dramatically improve the retirement outcomes of many people employed in companies that offer a retirement fund as a benefit to their staff (referred to as members in this article).

Our analysis of a large number of retirement funds indicates that there are many (although not all) who do an excellent job of assisting employees to build up retirement savings. Unfortunately, not enough is done to ensure that these savings aren’t squandered prematurely (the member accessing and spending them before they reach retirement) or when retirement is reached, that they aren’t spent too rapidly resulting in the pensioner outlasting his or her savings.

The Default Regulations are designed to try to plug some of the sources of the leakage preventing people from accumulating sufficient retirement savings. These leaks can range from inadequate long-term, inflation-beating investment returns; excessive costs; withdrawing the savings when changing jobs; fragmentation of savings due to multiple arrangements that aren’t ever consolidated and poor choices at the crucial point of retirement when difficult decisions are needed about complex products with insufficient information at hand and, in many cases, no ready access to trusted, cost-effective advice.

By requiring retirement funds to have sensible, well-thought-out, member-friendly defaults in place for their members who don’t make their own choices, the aim of the regulations is to:

1. 
   

   Ensure that the build-up of assets is steady and takes full advantage of compound interest;

   
   


2. 
   

   That it’s easy to simply leave retirement savings invested when changing jobs and

   
   


3. 
   

   That the accumulated pot of money is well spent at retirement on a product that provides a pension that increases in line with inflation and lasts as long as the pensioner (and also their spouse if applicable).

   
   

Along this journey from first pay cheque throughout their working career, catering for job changes along the way and finally, at retirement, members should have access to clear, concise, simple information about their benefits and their options, written in simple language.

Although not actually a requirement, access to a real person to get an explanation in your home language and have an opportunity to ask questions is preferable, rather than just receiving a document.

In the process of implementing the requirements of the Default Regulations, retirement fund trustees have had to educate themselves on products like annuities (which haven’t been in their purview until now), amend their rules in some cases and scrutinise their investment strategies to ensure that their funds are compliant with these new regulations.

Service providers have had to adapt their products to provide fee arrangements that are more aligned to the institutional fees paid by most retirement funds, where previously these products attracted higher retail fees.

They have also had to dust off and enhance their annuity solutions, like with profit annuities, which have proven to be popular with many trustee boards when developing their annuity strategies as per the regulations.

In addition, they have had to define, build, staff and equip their Retirement Benefit Counselling capability to be able to provide members with the required information, guidance and support, although the regulations do not require this service to extend to advice. This is a space to watch as I believe it will develop further as the needs of members are better understood through these initial engagements.

For some funds, especially the smaller ones, these additional onerous regulations may have been the straw that broke the camel’s back and this may have led the employer to move into an umbrella fund.

This enables them to benefit from the defaults and annuity strategies available within the umbrella fund, where the professional trustees have greater capacity to build solutions to meet the requirements of the regulations and, more importantly, of the members. The greater economies of scale within large umbrella funds has the potential to provide a further boost to asset accumulation by reducing fees and costs (provided such economies are passed onto members).

Putting in place the various defaults is, however, just the first step. If these regulations are to have the intended impact of driving better retirement outcomes for members, then it’s essential that trustees and service providers not only design solid default solutions but that they do their utmost to ensure that the members are informed of the defaults as well as any choices available to them either within the fund or when they leave.

In addition, they must be made aware that they have access to quality counselling in relation to their benefits. Funds should also endeavour to ensure that members understand the pros and cons of the solutions provided by the fund in comparison to the other solutions available to them in their personal capacity.

Take-up by members will be the ultimate test of whether these default solutions are just attempts by trustees to “tick-the-box” on the regulations or if they are genuine quality solutions that enhance members’ lives.

The initial response by both trustees and service providers has been encouraging and I expect the solutions in this space to develop and grow. Innovation will play a key role in the years to come to build solutions that will better meet the needs of members and allow them to achieve a retirement that resembles their dreams.

Many areas of legislation are designed to protect us from ourselves (laws around smoking and alcohol use, speed limits and the extension of credit come to mind).

It’s perhaps fitting that the default regulations will be to the ultimate benefit of retirement fund members, even if they are blissfully unaware of them. So in this case, ignorance of the law, though still not an excuse, could end up being very beneficial to the financial wellbeing of many South Africans when they reach retirement. BM