New “Default” Regulations to the Pension Funds Act
The new regulations will change that. Funds will be obliged to develop an “annuity strategy” – they will have to assist you by offering you some method of providing yourself with a pension, which meets specified standards.
You will not be forced to take this default pension option offered by your fund. If your fund currently allows you to make your own choice of pension – as most Defined Contribution funds do - you will still be allowed to choose your own pension provider and the type of pension that suits you best.
Any pension offered by your fund will have to be appropriate to your needs, at a reasonable and competitive cost, and with suitable communication (including “retirement benefits counselling” to explain this option, at least three months before your normal retirement date – noting that this may be in written form).
The pension offered by the fund may be in the form of a so-called “living annuity”, where your retirement savings stay invested, earning a return, and you choose each year how much pension to draw from it (within certain parameters). Just remember that if you use up all your savings, your pension stops!
Your “living annuity” may be paid from the fund itself, or the trustees may choose an insurer as their preferred provider, in which case the pension will be paid by the insurer. (For this purpose, many investment managers or multi-managers can also act as the insurer.)
The living annuity provider – the fund or the insurer chosen by the trustees – will have the responsibility for monitoring the income you are drawing from the living annuity, and warning you if you are running the risk of exhausting your savings before you die.
Currently, you will be allowed to draw an income of between 2.5% and 17.5% of your savings, per year, although restrictions may be placed on the maximum draw-down percentage at some future date. (The truth is that a yearly income of anywhere close to 17.5% of the capital is far too high for almost all members invested in living annuities, so these restrictions would be for your own good. In fact it is sensible to aim for a pension draw-down rate of 5% or less, when you retire!)
If your trustees offer you a living annuity as the default retirement option, you will be restricted to a choice of no more than four investment portfolios.
As an alternative, your fund could offer you a so-called “life annuity” pension. This is similar to the fixed lifetime pensions offered by the old Defined Benefit funds – the starting pension would typically be guaranteed for life, with increases on some contractual basis, and with a specified level of provision for your spouse and dependants if you die. The pension could be paid by the fund itself, but it is more likely that the trustees will choose an insurance company as their preferred pension provider.
Importantly, however, any options that you have at present will not be taken away – you will still have to make your own decision. But in future you will have a cost-effective alternative, which is clearly explained to you, and which your trustees have considered. And more information is always a good thing.
In the following pages, we put various questions to the investment managers, asking how they believe that key aspects of the new regulations should best be implemented, for the benefit of retirement fund members.
Erich Potgieter and Joanna Combrink, Willis Towers Watson