FUNDS FOR THE FUTURE
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.