Pension reform principles signal direction

FEW would argue with the statistics: the current position of South African retirees is far from desirable, with around 60 percent of pensioners living with monthly expenses exceeding their monthly income, according to the Sanlam Benchmark Survey 2015.

Mark Henson, sales director at Investec Investment Management Services (IMS) says National Treasury released their first paper aiming to address this situation in 2004.

“The paper highlighted concerns around poor member outcomes and recognised that meaningful regulatory intervention would be required to assist the industry with material change.

“Since then, while there has been much consultation between various stakeholders, in many respects the situation has gone from bad to worse. When one starts to unpack the issues, the multi-dimensional nature of this conundrum starts to become clearer.

“During the defined benefit environment of the 1990s the employer played a key role in member retirement funding. To a large extent, the dominant stakeholder in a retirement funding arrangement today still remains the employer, because they play a role in providing the appropriate retirement funding structure and they act as a conduit to facilitate the payment of contributions.

“However, in a defined contribution world the financial risk has shifted from the company to the individual, but there seems to be insufficient focus on the fund member, with their own unique aspirations and dreams for their future,” says Henson.

He says much discussion has been focused on the importance of getting defaults right, be that defaults relating to the appropriate retirement funding vehicle structure (stand-alone, umbrella or group retirement annuity), or default contribution levels, investment strategy, retirement age, and preservation and annuitisation options.

“In the meantime, can trustees do more now despite the delays in retirement fund reform? Let’s consider contributions levels for one,” says Henson.

“If the industry-accepted norm to target a net replacement ratio of 75 percent requires a 15 percent net savings allocation to investment with full preservation over a 40-year term, why do a large number of schemes today sit at levels well below this figure?

“Short-term affordability may be one consideration, but if the primary purpose for establishing a fund is to provide retirement benefits for its members which sustain their standard of living in retirement, then shouldn’t more funds be setting the default at the 15 percent level with an opt-out facility for members who choose to make an informed decision to reduce contributions?

“When leaving their retirement fund the vast majority of exiting mem- ber’s encash their benefit. With the help of professional advisors, trustees could establish a default preservation option now to retain a portion of the estimated R200-billion that leaves the pension savings industry each year.

“Of course members would always be free to opt out of the default position. For example, the Investec Preservation Pension/Provident Fund would be an ideal solution in this instance. Alternatively, a product such as the Investec Group Retirement Annuity, which has inherent preservation features, could be considered as a retirement vehicle for employees,” claims Henson.

He gives the example of the mobile market having gone through a large degree of customisation over recent times.

Gone are the days of everyone using the same standard model Today technology users insist on innovation from the likes of Apple and Samsung to allow for personalisation, from phone cover, to the settings, apps, wallpaper, and screensaver.

Henson says pension should be no different.

“Imagine your pension product being the cell phone hardware, and all the apps on the inside being your contribution levels, investment strategy, and retirement age.

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“All members contributing at the same level, investing in the same balanced fund and retiring in the month that you turn 65 is something for the history books. Let’s not forget about the growing risk of longevity. Greater flexibility and customisation is required and industry innovation and advancements in technology have been lacking in the pension world.”

Henson contends that South Africa can turn to other markets around the world that have embarked on similar reform journeys and learned lessons along the way.

“The US underwent a similar process in the 1970s and now some 40 years later are in a position to measure the outcomes of individuals. The move to personalised savings vehicles (401k schemes) has resulted in a more engaged consumer early on the process, increased ownership of their retirement savings, and arguably better outcomes.

“The current fragmentation and complexity in the South African market is part of the problem and product harmonisation is required. Consolidation into a single pension’s product per saver will improve reporting, planning, advice, costs and ultimately outcomes.

“Greater emphasis needs to be placed on member education and the milestones that savers should look to attain during the journey of the accumulation phase as a measure of objective tracking.

“We simply cannot afford to keep talking about change; now is the time for action,” says Henson.