An overview of this quarter’s
We start this edition with an article by Danie van Zyl from Sanlam Employee Benefits that introduces the concept of defaults and specifically highlights why trustees need to be particularly circumspect in how they formulate the defaults for their specific members.
Farai Muronda from Stanlib provides us with a brief write-up of what decision tree should be followed to get the best results and what the pros and cons of default solutions might be.
The great appeal of defaults really hinges on the whole issue of what happens to individuals when they are confronted with choice. Fran Troskie from RisCura cuts right to the heart of this dynamic in a discussion of the appeal − and limits − of defaults when it comes to managing the choice around the complex determination of the appropriate investment strategies to meet the funding requirements of retirement.
In the next section of this edition, Natalie van Zyl asks the allimportant question as to why people globally seem to resist the notion of annuitisation − full stop. In any number of countries, South Africa, the UK, US, and Singapore to name just a few, getting people to purchase a postretirement income stream through an annuity seems to meet resistance. We need to understand what the psychological block is, and address it, if we are going to pursue either a mandatory annuitisation strategy as a country or a default solution as is currently being posed by National Treasury to existing retirement funds.
What follows on naturally from this discussion is the question of what exactly these annuity solutions should look like if they are going to really meet this all-important income need. This is an area that has received far too little attention from the investment world. The problem is that the optimal answer is hugely dependent on an individual’s specific circumstances.
This raises some interesting challenges as to how default solutions could possibly fill this gap. John Anderson from Sygnia provides an interesting framework for facilitating that discussion with his article on the Retirement Income Frontier. We have partnered his article with a brief explanation by Karen Wenzel, also from Sanlam Employee Benefits, as to what National Treasury was requesting in reference to these default annuities.
Finally, we wrap up this edition on defaults with an article by Kelsy Moodley of Alexander Forbes, which really gets to the nub of the matter: how effective are default solutions at addressing the fact that members actually reflect highly differentiated needs and goals? And if defaults are indeed simply too crude a solution, what could provide a better answer?
Moodley discusses the concept of “smart defaults”, which are able to provide slightly better tailoring in the solutions, but suggests that perhaps even these don’t really go far enough.
She employs an example from the world of short-term insurance to illustrate how technological advances are now allowing some areas of financial product choice to create far more tailored solutions to meet an individual’s specific needs. Could this provide a better way forward?