Pro­pos­als to boost your sav­ings

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - BRUCE CAMERON

National Trea­sury says there are nu­mer­ous ways to bring down the cost of sav­ing for re­tire­ment, which would re­sult in you re­ceiv­ing a bet­ter pen­sion.

Trea­sury has put for­ward the fol­low­ing pro­pos­als for dis­cus­sion:

Fund con­sol­i­da­tion. Most re­tire­ment funds do not have the nec­es­sary mem­ber­ship and as­set size to achieve suf­fi­cient economies of scale, which leads to higher costs and lower ben­e­fits for mem­bers.

Im­proved fund gov­er­nance. This in­cludes putting a stop to con­flicts of in­ter­est where, for ex­am­ple, a ser­vice provider en­cour­ages a fund to use a par­tic­u­lar ser­vice, be­cause it would un­fairly make a profit at the ex­pense of the fund and ul­ti­mately its mem­bers.

Stronger reg­u­la­tion. A strong and ef­fec­tive reg­u­la­tor is es­sen­tial to en­sure a well­func­tion­ing re­tire­ment sys­tem. The reg­u­la­tor needs to have the power to mon­i­tor all as­pects of the re­tire­ment-fund­ing sys­tem, in­clud­ing costs, and to in­ter­vene when nec­es­sary to pro­tect the in­ter­ests of mem­bers.

Work­place re­tire­ment pro­vi­sion. With the higher costs as­so­ci­ated with in­di­vid­u­ally dis­trib­uted re­tire­ment ve­hi­cles, such as re­tire­ment an­nu­ities (RAs), and em­ploy­ees’ low level of fi­nan­cial lit­er­acy, Trea­sury rec­om­mends that the work­place re­mains the pri­mary arena where re­tire­ment sav­ings prod­ucts are dis­trib­uted.

Sim­pli­fied prod­ucts. To in­crease com­pe­ti­tion based on price, Trea­sury pro­poses that re­tire­ment prod­ucts be sim­pli­fied sig­nif­i­cantly be­fore they can qual­ify for tax ex­emp­tions for mem­bers.

This may im­ply a stan­dard­i­s­a­tion of per­mit­ted charg­ing struc­tures, a re­quire­ment that all mem­bers are charged on the same ba­sis, and a re­stric­tion on the in­vest­ment op­tions, if any, that funds may of­fer their mem­bers to those that com­ply with pre­scribed stan­dards.

Re­tire­ment funds that grant their mem­bers a choice of in­vest­ment port­fo­lios may have to pro­vide de­fault port­fo­lios that meet more strin­gent re­quire­ments, in­clud­ing an out­right ban on any exit penal­ties for early re­tire­ment or loy­alty bonuses and, pos­si­bly, a cap on re­cur­ring charges, to pre­vent prod­uct and ser­vice providers from shift­ing from one form of charge to an­other.

Ef­fec­tive sell­ing. The need to sell prod­ucts and pro­vide con­sumers with ad­vice may be com­pro­mised by high costs and re­mu­ner­a­tion struc­tures that re­sult in con­flicts of in­ter­est. Work is un­der way in the re­tail space to ex­plore ways in which the in­cen­tives of­fered to in­ter­me­di­aries may be bet­ter aligned with serv­ing con­sumers’ needs.

Var­i­ous as­pects of linked-in­vest­ment ser­vices provider (lisp) plat­forms, in­clud­ing the pay­ment of re­bates by in­vest­ment man­agers to lisps, are to be in­ves­ti­gated.

Com­pul­sory fund mem­ber­ship for all em­ploy­ees. Em­ploy­ers may au­to­mat­i­cally have to en­roll their em­ploy­ees in a re­tire­ment fund, which may be a stand-alone pen­sion fund, an um­brella fund or an RA fund.

The cre­ation of a re­tire­ment fund ex­change or clear­ing house. To en­sure cost­ef­fec­tive com­pul­sory fund mem­ber­ship, an ex­change could be cre­ated that would en­able smaller em­ploy­ers and their em­ploy­ees to com­pare dif­fer­ent re­tire­ment plans eas­ily and to choose one that meets their needs with­out re­quir­ing fi­nan­cial ad­vice.

Funds that sat­isfy cer­tain cri­te­ria, in­clud­ing economies of scale, de­sign, ef­fi­ciency and sim­plic­ity, will be per­mit­ted to list on the ex­change.

De­fault funds. De­fault funds could be pro­vided on the re­tire­ment fund ex­change for em­ploy­ers who do not spec­ify a fund for use by their em­ploy­ees. De­fault funds could also be used to fa­cil­i­tate the preser­va­tion of sav­ings be­fore re­tire­ment and to en­sure that un­claimed re­tire­ment ben­e­fits are man­aged ef­fec­tively.

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