De­faults and a dummy’s guide to prod­uct choice

Finweek English Edition - - COLLECTIVE INSIGHT - Is head of an­nu­ities at San­lam Em­ployee Ben­e­fits.

By Karen Wentzel

Dur­ing July 2015, Na­tional Trea­sury pub­lished the which set out de­tailed re­quire­ments to con­sider when set­ting up de­fault strate­gies.

As the cur­rent sys­tem pro­vides no pro­tec­tion for mem­bers at re­tire­ment, in­di­vid­u­als have been left on their own to make one of the most im­por­tant fi­nan­cial de­ci­sions of their lives. Most peo­ple have fo­cused on build­ing wealth be­fore re­tire­ment, while pay­ing no at­ten­tion to what should hap­pen at and dur­ing re­tire­ment.

All re­tire­ment funds should have an ac­tive re­spon­si­bil­ity to as­sist ex­it­ing mem­bers, many of whom are at their most vul­ner­a­ble when they re­tire, with lit­tle or no fi­nan­cial ad­vice pro­vided. The draft reg­u­la­tions stip­u­late, there­fore, that all de­fined con­tri­bu­tion re­tire­ment funds will be re­quired to have a de­fault an­nu­ity strat­egy in place.

There are sev­eral rea­sons why peo­ple may choose not to make a choice. They may feel they’ll make the wrong de­ci­sion. They might sim­ply not en­joy choos­ing. They might be too busy. They might lack suf­fi­cient in­for­ma­tion or could be over­whelmed by too much in­for­ma­tion. The role of trus­tees is thus very im­por­tant in set­ting up the ap­pro­pri­ate de­fault so­lu­tion.

The fol­low­ing op­tions are al­lowed as de­fault an­nu­ities:

Guar­an­teed pen­sions, liv­ing an­nu­ities, with-prof­its pen­sions

Life an­nu­ities guar­an­teed

by in­sur­ers Trus­tees will be al­lowed to mix dif­fer­ent prod­ucts as part of the strat­egy. Funds must give mem­bers ac­cess to re­tire­ment ben­e­fit coun­sel­lors to as­sist them with un­der­stand­ing the de­faults. De­faults will not be com­pul­sory and mem­bers will be al­lowed to opt out.

Trea­sury’s re­quire­ments for a fund’s de­fault an­nu­ity strat­egy are: good value for money, well com­mu­ni­cated to mem­bers, and trans­par­ent

dis­clo­sure on all fees and charges.


For all life an­nu­ities, the pen­sioner will carry no longevity or in­vest­ment risk, as ini­tial pen­sions and in­creases are guar­an­teed for life and guar­an­teed to never de­crease. These an­nu­ities pro­vide the an­nu­ity holder with a pen­sion that in­creases at a fixed rate over the re­main­der of their life. These an­nu­ities will pro­vide the high­est ini­tial pen­sion, but pen­sion pay­ments may not nec­es­sar­ily keep up with the in­crease in the cost of liv­ing. The in­fla­tion-linked an­nu­ity pro­vides pen­sion­ers with a guar­an­teed monthly pen­sion with an­nual in­creases equal to in­fla­tion (CPI), to pro­tect the pen­sioner’s pur­chas­ing power. Pen­sion­ers can choose to re­ceive be­tween 50% and 100% of CPI in­fla­tion in­creases. In­dex-linked an­nu­ities pro­vide pen­sion­ers with a guar­an­teed monthly pen­sion with an­nual in­creases linked to pub­lished indices, for ex­am­ple the All Share In­dex or All Bond To­tal Re­turn In­dex. Nor­mally an ex­plicit, fully trans­par­ent for­mula is used to de­ter­mine the in­creases, which re­moves all sub­jec­tiv­ity and as­so­ci­ated con­ser­vatism.


Liv­ing an­nu­ities pro­vide pen­sion­ers with an in­come from their re­tire­ment sav­ings with flex­i­ble in­vest­ment choice and with­draw rates. In ex­change for this flex­i­bil­ity, pen­sion­ers take on the risk that they out­live their sav­ings and the risk of poor in­vest­ment re­turns.

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