Many articles have been written about retirement reform and even more have speculated on the possible consequences that this would have on the retirement fund industry.
These articles tend to be complex and rightly so, as retirement reform in its own right is a very complex issue.
For the average investor, it can be difficult to understand the proposed reforms and the impact that these will have.
Thereforms are currently being championed by National Treasury, with a number of key objectives.
These objectives can be summarised in the following 8 key points:
1. Improving preservation
The reality is that too many individuals take the cash option when they resign from their employers, rather than preserving their existing savings and benefitting from the compound interest in later years. The aim is not to “force” members to preserve their assets, but rather to make it more attractive to do so. This will be a tough task though. For many employees, their retirement savings are their only cash reserve in an environment where the unemployment rate hovers around 25%.
2. Improving fund disclosure
Knowing what you have increases the value of what you have. Knowing what you pay away in costs and how this impacts on your eventual retirement benefit, is even more important. For many years, investors never fully understood their benefits and the retirement industry (administrators, asset managers, consultants and life assurers) disclosed the bare minimum, in terms of fees and charges.
Retirement reform aims to improve disclosure and the long term impact of fees. As a result, funds will be encouraged to communicate this information to their members in a simple easy-to-understand manner.
3. Making retirement savings compulsory
Currently, there is no legislation that forces an employer to provide retirement benefits to their staff, barring bargaining counsel agreements and where the employer already has an existing fund. This voluntary nature unfortunately has a huge impact on our retirement system, as a large percentage of the working population will never have access to a retirement fund. Employers with only a handful of employees find it expensive to join a retirement fund, or do not want to be burdened by the responsibilities.
It will be difficult for Government to “force” all employers, especially in the SME and informal markets, to provide retirement benefits for their staff. This is especially the case if the minimum entry levels are high and products are not geared for companies with only a few employees or low contributions.
4. Getting defaults right
Treasury would like to see that employees who do not, or who are unable to, make their own retirement fund decisions follow the most appropriate and cost effective path. This would include a risk-appropriate, low fee investment mandate according to the member’s investment time horizon. This would extend to automatic preservation and appropriate post retirement products.
5. Simplifying retirement savings and improving portability among providers
Simplicity is critical. A standardised, simple product not only improves investors’ understanding of their fund, it is also more cost effective.
Standardised products are easier to transfer between administrators, whereas complex products, which are difficult to understand and generally very expensive – tie the members to a specific administrator, as members believe that they may lose a benefit.
The suggestion is to keep retirement benefits separate from the so-called bells and whistles. Simple and portable products will increase market competition between providers that will reduce costs, according to National Treasury.
6. Providing tougher market conduct and more effective supervision
The key lesson learnt by Government following the 2008 Global Financial Crisis is the need for tougher and more effective and intrusive regulation.
As international reforms in the global banking and insurance start taking effect, Treasury suggests that the retirement and savings industry in South Africa be more regulated, to protect members and to improve market practices.
The Industry is concerned that increased regulation will increase administrative costs. This can, however, be offset if the industry moves to simpler standardised products and practices.
7. Consolidating Funds
Consolidating and standardising funds, in terms of investments and benefit structures, should improve efficiencies and economies of scale. We are already seeing some of the larger insurers amalgamating retirement funds, in an effort to achieve this.
8. More effective intermediation
Treasury would like intermediaries who sell life assurance products, such as retirement annuities, to be remunerated in a manner that is fair and does not create conflicts of interest. Some of the more effective practices which have already been implemented include the Client Contact Disclosures requirements, as well as the Conflict of Interests legislation, which financial advisers must adhere to.
National Treasury has consulted with the industry for a number of years and we have started to see the effect of the implementation of certain reform aspects. From March 2015, contributions towards provident funds will be treated as “contributions to a pension fund”, with the aim of ultimately providing a regular income in retirement, rather than a lump sum. Existing benefits will be preserved and only new contributions will be affected.
There is still a long way to go before we see the full effect of retirement reform, however, each little step and change that is implemented has the ultimate goal of protecting and enhancing the benefits of retirement fund members.