The risks of switch­ing

Few funds amended their rules to al­low for pre-vest­ing trans­fer.

Finweek English Edition - - Retirement fund trustees -

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

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