The risks of switching
Few funds amended their rules to allow for pre-vesting transfer.
PROPOSED CHANGES to the Pension Funds Act will allow members of retirement annuity (RA) funds the unrestricted right to transfer their investment from one RA fund to another. This has generally been welcomed because it removes restrictions on people providing for their retirement, and should increase competition in the financial services industry for these investments. fer. “Most fund trustees felt that unrestricted pre-vesting transfer presented more pitfalls than benefits to fund members,” Van der Vyver says.
However, the proposed new section, if enacted, will allow members to make the decision. But there could be serious repercussions for RA funds, their trustees and the retirement industry as a whole. “Whether this will ultimately benefit consumers remains to be seen, as switching between RA funds will have cost implications for members that are not always apparent,” Van der Vyver notes.
A transfer out of an RA fund involves surrendering the policy with the fund’s underwriter. Policy values are then recalculated. “Depending on when in the life of the policy this takes place, policy values may be reduced.”
Van der Vyver adds that commission or other remuneration will ordinarily be paid to intermediaries who advise fund members regarding the transfer.
“The unfortunate reality is that there are financial advisers who advise clients to replace existing investments with a view to their own financial gain and with little or no regard to their clients’ best interests. Such unscrupulous advisers may see the proposed amendment to the Pension Funds Act simply as an opportunity to earn commission.” Van der Vyver says that to best serve their members, trustees must ensure that those wanting to switch RA funds are informed of all the implications as fully as possible and that they understand there may be financial disadvantages. “If members make several switches, based on the vicissitudes of fund-performance levels from time to time, the various surrenders will most likely erode the value of their retirement savings.
But the proposed legislation also carries increased responsibility for RA fund trustees.
RA funds are allowed a rule, following amendments to the Income Tax Act in 1998, for such transfers. But in practice few funds allow them.
Belinda van der Vyver, a pension fund specialist at Walkers Attorneys, says as this was “a permissive, not a prescriptive, provision, the trustees of many funds considered that while transfers might be allowed in terms of the tax laws, it was not in the best interests of members and their funds as a whole”.
Subsequently, few funds amended their rules to allow for pre-vesting trans-
Switching between RA funds will have cost implications. Belinda van der Vyver