Proposals aimed at nudging you to do the right thing and preserve your retirement savings if you leave your job and helping you to convert your savings to a pension at retirement, were released by National Treasury this week.
The far-reaching proposals, contained in draft regulations under the Pension Funds Act, won’t remove your right to take your retirement savings in cash from an employer-sponsored fund if you leave your job, but will force you to think twice about doing so.
This is because your fund will be obliged to preserve your savings in the fund and give you a certificate saying you are a paid-up member of the fund. If you move to a new employer, your new employer’s fund will be obliged to transfer your savings into the new fund unless you specifically tell the fund you do not want your savings to be transferred, or if the transfer is not possible – for example, savings in a retirement annuity (RA) cannot be transferred to an occupational fund.
Treasury’s intention is that there should be a database of all paid-up members of all funds, and your new fund will be able to establish from this database whether you previously belonged to a fund and then assist you to transfer your savings to your new fund.
The aim is that you preserve your retirement savings in a fund by ensuring your savings follow you from job to job, rather than defaulting to a situation where you withdraw the money.
You will still always be able to withdraw the money or move it to another fund of your choice, but you may be less tempted to withdraw and you will have an alternative to moving your savings into a retail RA or preservation fund, which may involve higher costs for you.
If you leave an employer and decide to take your benefits in cash or transfer to another fund, your old fund will arrange a consultation with a retirement benefits consultant. The consultant will have to explain to you the tax you will pay on the lump-sum withdrawal and the long-term implications of prematurely withdrawing your savings in terms of the income you will receive in retirement.
If you still decide to take your benefit in cash, you will have to make a written request to withdraw the money.
If you leave your savings in the fund of your former employer, your benefits must grow by the fund return (or inflation in the case of a fund that provides a pension based on final salary), according to the proposed regulations. And you will be able to take your savings as a benefit at the retirement age set by the rules of the fund.
The costs you pay must be the same as those you would have paid if you remained an active contributing member of the fund.
By encouraging you to preserve your retirement savings, Treasury hopes to boost the country’s savings rate and lower the cost of saving for all retirement fund members.
The proposals, if adopted, oblige the trustees of your retirement fund to make preserving your savings in your fund the default option, or automatic choice.
All funds, including RA funds, but excluding defined-benefit funds that provide a pension at retirement, will be required to have a default annuity for you to convert your savings into a pension.
These default annuities will have to be invested in line with the investment guidelines in regulation 28 of the Pension Funds Act.
The draft regulations also oblige funds to provide you with access to a retirement fund counsellor at least three months before you retire, to advise you on your options for investing your savings.
It is also proposed that your fund should be able to offer you a default guaranteed, or life, annuity provided by a life assurance company, but if it offers you any other kind of annuity as a default annuity (living or with-profit), it must be provided by the fund itself (known as an in-fund annuity).
If you take a guaranteed annuity, you buy a guaranteed life-long pension with a pre-determined increase (or no increase).
Most retirees use living annuities, in which you choose the investments to fund your pension, but take the risk that the investments will not sustain your income for life.
It is proposed that if funds offer you a default living annuity, the amount you can draw as an income must be restricted, depending on your age, and the investments must be in line with regulation 28 of the Pension Funds Act. This primarily means your equity exposure is limited to 75 percent of your savings.
The regulations also allow funds to offer you a with-profit annuity, where your increases depend on market returns and the life spans of the annuitants.
The explanatory memorandum to the regulations says that if a fund offers you an in-fund pension as a default annuity, it does not need to guarantee these pensions and the increases on them. This means that if the fund gets into trouble, your pension could be adversely affected.
Treasury says in its explanatory memorandum that while funds protect members’ savings up to retirement, at retirement members are then left to the retail market, where they must bear the risks of retirement on their own, including the risks of poor financial advice, poor decisions, and high charges.
* The regulations have been published on National Treasury's website (www.treasury.gov.za) and are open for comment until September 30.
DEFAULT STRATEGIES
Every retirement fund will have to have a default investment strategy that does not include performance fees, loyalty bonuses or any similar charge structures if draft regulations released by National Treasury this week are adopted.
The regulations apply only to the default investment strategies, but most members make use of the defaults in funds with investment choice. If a fund has no investment choice, its only investment strategy will be regarded as the default.
The regulations as proposed will have implications for the investment industry, as many retirement investments have exposure to portfolios with these fees.
You must be given a choice to opt for an investment strategy other than the default one, but if you fail to make a selection, the default option will apply.
The regulations propose that trustees consider passive or enhanced passive investment strategies for default investments.
They state that the default investment strategy must be appropriate for all members and must be communicated to you in clear, understandable language.
It is proposed that fees charged on the default option must be disclosed to you and must be reasonable and competitive.
PROPOSALS LIKELY TO STIR DEBATE
Defaults are good idea and can improve the pensions you will ultimately receive from your retirement fund, a quick poll of representatives from life companies, retirement fund administrators and asset managers reveals.
But there is likely to be debate about the details of just what those defaults should be and what they will achieve.
Rowan Burger, the head of alternative investments at Momentum Employee Benefits, says defaults are critically important and as a member you can use these as a benchmark against which to measure other annuity or investment choices.
Helping trustees to use their bulk buying power and knowledge of the industry to secure cheaper arrangements for members will also improve retirement funding outcomes for you, he says.
However, while in some cases the draft regulations give appropriate guidance to trustees on how to select an appropriate default, in other cases the draft regulations are are too “paternalistic” in prohibiting the inclusion of other industry options.
Alexander Forbes, the country's largest retirement fund administrator, says the introduction of a default annuity is positive, but it would like living annuities provided outside of a fund being subject to the same restrictions as an in-fund arrangement and with some accountability on the living annuity provider for the default investment, John Anderson, the managing director of research and product development at Alexander Forbes, says.
David Gluckman, the head of special projects at Sanlam Employee Benefits, says getting the right annuity is a complex decision on which you need advice about your choice relative to issues such as your savings level, your health and whether you have a spouse.
In addition, a decision to buy a guaranteed annuity is an irrevocable one, he says.
Gluckman says there needs to be a big lead in time before the default annuity becomes a requirement for funds to enable trustees to put the right arrangements in place.
Commenting on the draft regulation that will allow funds to provide pensions that do not have capital backing, Burger says this exposes pensioners to the risk of the fund failing to meet future commitments. He says life assurers’ products are relatively more expensive, but they have the assets, significant solvency reserves and shareholder capital to provide you with the certainty that you will get your pension.
The requirement that default investment strategies do not include performance fees will have a major impact on existing retirement fund investments and could lead to managers charging higher base fees, both Gluckman and Anderson say.
But Pieter Koekemoer, the head of personal investments at Coronation, says that most asset managers offer a multi-asset fund with no performance fee as the default for retirement funds that offer investment choice.
He says well structured performance fees will only pay an active manager when it outperforms a passive investment and can assist in reducing fees.
Koekemoer says the collective investment schemes industry is busy developing a standard for performance fees that it hopes will address the concerns National Treasury and lead the way to performance fees that abide by the standard being allowed as default investments in retirement funds and in tax-free savings accounts.
Burger says an appropriate performance fee structure can create a cheaper base fee for members and trustees are better equipped than members to understand what the appropriate performance fee should be.
Anderson says the requirement in the regulations that trustees consider passive investments could lead to increased use of these investments, but Gluckman says the debate on whether passive investments are better is not clear.
While welcoming the proposal to introduce default preservation of retirement savings in a fund when a member leaves his or her employment, Anderson says the Alexander Forbes is not sure that the measure goes far enough to change members’ behaviour. He says it may be necessary to compel members to preserve their savings.
Alexander Forbes believes the root causes of the lack of preservation, including members spending more than they earn and over-indebtedness, need to be addressed first, he says.
Burger and Gluckman say some occupational funds are not geared to deal with individual former members as they typically deal with an employer's payroll and human resources departments.
Burger says developing the ability to deal with individuals will increase the costs in these funds.
Both Burger and Gluckman say paid-up members could result in an increase in unclaimed benefits if these members die without claiming their benefits and their dependants are unaware of them.
Alexander Forbes is of the view that the introduction of “retirement benefits counsellor” will go a long way to improving your retirement fund outcomes, but Gluckman says it could be difficult to implement and there could be consequences for financial advisers.
DATE FOR TAX CHANGES NOT AMENDED
The draft Taxation Laws Amendment Bill contains no proposal to amend the date set for the introduction of new tax deductions for contributions to retirement funds.
Changes to the Income Tax Act made in 2013 introduce new tax deductions for contributions that are the same, regardless of whether you belong to a provident fund, pension fund or retirement annuity. When the changes are adopted, provident fund members will also be required to buy a pension with contributions made to their funds after that date, if above certain minimums.
Initially, the changes were due to become effective in March this year, but in response to union opposition to the changes, the implementation date was changed to March next year. Treasury indicated that the date could be postponed to March 2017 if its negotiations with trade unions and business were not successful.
Last year the unions demanded that a paper outlining retirement and social security policy reform be released before any further changes to retirement funding is implemented.
This paper has yet to be released, but Treasury's deputy director-general of tax and financial sector policy, Ismail Momoniat, indicated this week that he was not expecting the implementation date to change. However, the minimum amount above which provident fund members would be required to purchase an annuity could still be adjusted.
The government is still consulting with Nedlac on these and other proposals and will report to Parliament on its progress, Momoniat says. At the end of these consultations, some changes can be expected, particularly on the minimum amount, he says.
Currently, the minimum is set at R75 000, but it is due to change to R150 000 when the tax changes take effect. Any provident fund member who is under the age of 55 when the changes take effect will be expected to buy an annuity with two-thirds of the contributions made after this date and the growth on those contributions that at retirement exceeds R150 000.
Provident fund members will, at retirement, still be able to withdraw in full any savings accumulated in their funds before the implementation date and the growth on these savings until retirement.