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CityPress - - Business - MAYA FISHER-FRENCH busi­ness@city­press.co.za

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.

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