FUNDS FOR THE FU­TURE

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

mem­bers’ best in­ter­ests, even when mem­bers are not fully en­gaged with their retirement funds.

In the fu­ture, it is clear a lot of re­spon­si­bil­ity will be placed on the boards of trustees of funds to un­der­stand their prod­ucts and en­sure ed­u­ca­tion about prod­ucts is im­proved. A fund will need to have a set of de­fault poli­cies that are in the long-term in­ter­ests of mem­bers, and de­fault prod­ucts will need to be suit­able for mem­bers of the fund. They must also pro­vide good value for money and mem­bers must un­der­stand them.

The changes also re­quire each fund to have a ben­e­fits coun­sel­lor, though they haven’t spec­i­fied the qual­i­fi­ca­tions and whether this would add costs to be borne by mem­bers.

The cost fac­tor of hav­ing a de­fault in­vest­ment port­fo­lio has also not been ex­plored in suf­fi­cient de­tail, in our view, as the pro­posal at this point is just that all fees and costs must be reg­u­larly and ac­cu­rately dis­closed. The level of dis­clo­sure is not clearly clar­i­fied and this could be a dif­fi­cult pro­vi­sion to ap­ply in prac­tice.

How­ever, our con­cern is some of the sug­gested de­faults may be too com­plex, whereas the very sug­ges­tion in the doc­u­men­ta­tion is they should be sim­ple and cost ef­fi­cient and mem­bers should not be locked in.

For ex­am­ple, one of the sug­gested de­faults is liv­ing an­nu­ities. But, liv­ing an­nu­ities should not be a de­fault op­tion for funds with mem­bers who don’t even un­der­stand tra­di­tional an­nu­ities. And it could be ar­gued a de­fault an­nu­ity is un­likely to be the best retirement op­tion for ev­ery­one.

A proper process is needed to in­tro­duce all the facets of the changes, or else it could lead to ad­min­is­tra­tive dif­fi­cul­ties. Ad­min­is­tra­tion is set to be­come more com­plex, as for exam- ple de­ter­min­ing pay­ment dates and amounts of lump sums.

As au­di­tors of retirement funds, we would like to see the change hap­pen in a struc­tured way that ul­ti­mately ben­e­fits mem­bers and does not add to their cost bur­den.

A con­cern about a blan­ket ap­proach to de­fault op­tions is that they do not take the in­di­vid­ual cir­cum­stances of all mem­bers, like age and risk ap­petite, into ac­count. It is there­fore un­likely a de­fault would be good for ev­ery­one.

Most peo­ple also re­quire cash at retirement to set­tle some debt and this amount will dif­fer. How­ever, re­quir­ing mem­bers to pur­chase an­nu­ity on retirement will im­prove preser­va­tion and in prin­ci­ple this is one as­pect of the pro­posal that is favourable — SA’s poor sav­ings and retirement preser­va­tion rates are a ma­jor con­cern.

Pic­ture: iS­TOCK

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