Regulated default annuities mean a more secure retirement
think beyond saving to retirement age and consider “cradleto-grave” investment goals. They will be required to assist members during both the accumulation phase and the retirement phase. Prior to the regulations, trustees were required to assist members only during the accumulation phase.
The regulations resonate with regulation 28 of the Pension Funds Act, which requires trustees to consider their fund’s liabilities (or, in this case, each member’s retirement goals) when investing.
Trustees of defined-contribution funds (most retirement schemes in South Africa) will have to comply with the new regulations by formally implementing a default arrangement for current fund members, members leaving the fund and retiring members. Where a fund has already started putting any of these default arrangements in place, the board has until March 1, 2019 to align them with the new regulations.
Although the regulations have been in the pipeline for at least two years, implementation of default annuities has been slow. About half of the respondents to the 2017 Sanlam Benchmark Survey – many of whom are trustees – indicated that they have not yet started to implement default annuities. This hints at the governance issues with which many trustees already struggle.
Trustees are likely to face two additional challenges when implementing a default annuity strategy. The first challenge will be to navigate their way through the various types of annuity products, many of them quite complex, offered by the different providers. The second challenge will be engaging with generally disconnected and uninterested fund members to align them with an appropriate default annuity product.
In the race to implement default arrangements, and in light of the challenges mentioned above, the risk is that trustees will opt for off-the-shelf turnkey solutions that are tacked onto existing options.
Instead, trustees should see the regulations as an opportunity to reframe their view on the “cradle-to-grave” journey from their members’ perspective.
RisCura believes the regulations are an opportunity to implement a retirement phase that complements the goaldriven investment strategy of the accumulation phase. Both phases can be integrated into a solution that allows for a seamless transition from pre- to post-retirement, while taking advantage of the institutional benefits offered by the accumulation phase. Petri Greeff is the principal of investment consultancy RisCura.