Less than a year before new rules kick in to help retirement choices
March 2019 will usher in counselling and default products to safeguard pension nest eggs
The scariest financial milestone for most people has to be the moment of retirement. Never mind the emotional implications of no longer going to work, and the potential boredom.
Under the defined contribution arrangement, you are largely on your own when it comes to choosing what kind of pension you will take — guaranteed level and living annuity, to mention just two of the choices. And you will have to choose between providers, whether from large insurance groups such as Old Mutual or Sanlam, or a range of unit trusts sold on the Allan Gray or Stanlib platforms.
A small minority have financial advisers, but in my experience if you only meet an adviser at the point of retirement he is likely to put you into a cookie cutter, one size-fits-all product. And it’s not cheap; they can happily extract up to 1% of your fund value for questionable extra benefit.
So I was pleased to see that Sanlam Employee Benefits (SEB) is offering free retirement benefits counselling to all its umbrella fund and standalone administration clients. This counselling is meant to be in place by March 1 2019, the same day default annuities and retirement investment portfolios are introduced — not that many funds have made much progress on any of these issues.
SEB boss Dawie de Villiers says it will be easy enough for trustees to comply with the legislation, but this won’t have much impact. Rather, he supports empowering fund members with accurate and understandable information to make better financial decisions.
SEB has a retirement optimisation service that includes telephone-based access to information and some online communication tools, including roboadvice. Retirement counsellors will not be paid as a percentage of the client’s wealth, so there will be no perverse incentive to service only the wealthier members of fund. The rich have less need for this kind of advice as they should have engaged the services of a financial adviser long before retirement.
There seems to be some confusion about retirement benefit counselling. According to the Benchmark survey, 29% believe it is predominantly about written communication, which has never proved effective. Some 14% expect to rely on the human resources team at their workplace. Yet in the Sanlam Benchmark survey, only 44% of fund trustees believed they would have retirement counselling in place by the March 1 deadline.
SEB head of special projects David Gluckman told the recent Sanlam Symposium that there is a high membership rate of funds in SA as well as a large pool of savings, yet only 10% of South Africans can maintain the same standard of living on retirement as they did while they were working. Default annuity regulations can’t create more wealth, but they should take a lot of stress away from the 80% or more of members who do not want to make a decision, and in the case where the default is clearly the wrong product, a skilled benefit counsellor can point this out.
In a survey carried out among the funds administered by SEB and ACA (the old Absa Consultants & Actuaries, which Sanlam has bought), two-thirds believed the default regulations will definitely or probably increase the risks of being a trustee. By definition the default product is the trustee’s best view, but it can never be a universal solution. And it is not a silver bullet. Only 55% believe it will be either extremely effective or very effective in improving retirement outcomes, though none believed it would not be effective at all.
Four out of five trustees believe they will have a default investment strategy in place by March 1, and this is no surprise as an estimated 50% to 60% of funds already have investment defaults: quite right too, complete free choice with no recommended default is an irresponsible strategy while members are building up capital. Default infund preservation is a relatively simple product to implement and it often makes sense to keep assets parked in the fund and pay institutional fees rather than transfer it to a retail fund.
Even better news is that it might lead to fewer members cashing in withdrawal benefits, though one-third of trustees believe members will do anything to access their benefits in cash. The other two-thirds are living in a dreamworld. If they are allowed to, most people will opt for the money.
Perhaps the biggest concern is that barely half of funds expect to have introduced an annuitisation strategy by March. It is complex, so trustees had better get a move on and get a policy in place. Who knows, the tardy ones might find the Treasury imposing its own default. It could force funds to lend it money by making them invest entirely in RSA Retail Bonds.
I was surprised to see that almost half (46%) of trustees expect just one default annuity for the entire payroll. Of those who plan to offer different strategies, either some kind of demographic profile based on age and income would be the differentiator, or simply on the size of member share or the accumulated assets in the fund.
A portion of the membership is likely to be steered towards living annuities. These consist of a basket of unit trusts with quite generous latitude on drawdown levels. But they can run dry if withdrawals are too reckless. Gluckman says an institutional living annuity offered by a pension fund could easily have total annual costs 1% below a retail fund. It would not have as much choice, but certainly adequate choice. This product could provide a R4,000/month larger pension on R5m of capital.
Guaranteed annuities provide certainty for life but they erode with inflation.
An inflation-linked annuity with an underlying guarantee might look ideal, but they are very expensive and the initial income can be intolerably low.
GUARANTEED [RETIREMENT] ANNUITIES PROVIDE CERTAINTY FOR LIFE BUT THEY ERODE WITH INFLATION