his week, the Treasury released its latest paper on retirement reform – Retirement Reform: Lowering Charges and Improving Market Conduct – in which it makes recommendations for default retirement options, which will provide individuals who do not want to be actively engaged in their retirement decisions with a reasonable retirement solution.
The recommendations, in essence, will require pension and provident funds, as well as retirement annuity funds, to have a default investment option for all members, not only for the accumulation of their retirement funds but also when changing jobs or retiring.
Most retirement funds already have default options in place for members who do not make an investment selection.
The Treasury, however, argues that “in many cases, individuals are automatically defaulted into investment strategies that have complex and high charges, complex policy conditions, exit penalties and/or expensive guarantees”. It further argues that funds do not make sufficient use of costeffective passive investments – opting for more expensive, actively managed funds.
The Treasury is therefore proposing specific criteria for these default funds, including low costs, the use of passive funds and the banning of investment performance fees.
All fees must be disclosed to members, as must the impact of those fees, and the Treasury requires that fees be competitive and benchmarked on a regular basis.
Trustees will also need to ensure that any default option is appropriate based on each member’s age, time horizon and income.
Considering that the vast majority of retirement fund members use the default option, improving policies around default options will ensure the long-term interests of members, rather than of service providers.
The default options are also aimed at improving preservation rates by requiring that all retirement funds into which members are enrolled as a condition of employment have a default preservation strategy.
This means that on resignation, a member can either leave their retirement funds with the former employer or transfer to the new employer’s preservation fund.
This would allow members’ retirement savings to follow them automatically from job to job as they change employment throughout their careers.
On retirement, default annuity funds will be available to retirees.
The Treasury raised concerns that, under the current system, retirees have no protection or advice when they retire, “making it too easy for individuals to fall prey to unscrupulous advisers or make the wrong investment decisions”.
The Treasury argues that all retirement funds have a responsibility to assist existing members and that all defined contribution retirement funds, including retirement annuity funds, will be required to have a default annuity strategy in place.
Funds must also make retirement benefit counsellors available to members on retirement to help them understand the default annuity strategy.
This means that members will not have to purchase annuities in the retail market place, which could lead to significantly reduced costs for retirees.
It is important to note that members can, however, opt out and move into other annuity products of their choice if they want to.