Pension pot protection

THE GROUP REPORTED A R474M LOSS IN THE SIX MONTHS TO END-JUNE FROM A R34.4M PROFIT PREVIOUSLY

fter several years of back and forth between government and the service providers, the default regulations for pension funds will go live on Friday September 1. As few people are qualified to make decisions about where to invest their pension pots it makes sense to introduce defaults.

They can be suitable for the large majority of fund members. And it is not as if the financial advisory fraternity is equipped to advise all members — right now it is interested only in the top executives. Under the new regulations there will be several defaults that trustees will be expected to introduce.

In the case of those of us moving into umbrella funds, it is now up to the professional trustees of the overarching fund to make these decisions. They have the right knowledge to do so, but they will be conflicted. It will be a dilemma for, say, the Old Mutual, Sanlam and Liberty umbrellas whether they should favour the asset managers and risk providers in their stable.

There will be a default option for all who want to preserve their retirement capital on resignation rather than withdraw it. I know how easy many funds make it to take money out, as it has been a hassle to maintain a paid-up member on the books.

But treasury is strongly in favour of in-fund preservation, not least because it keeps down costs. Of course in the lax environment of SA, with no compulsory preservation, the money doesn’t have to stay in the fund until retirement. The employee has the right and option to withdraw on request the accumulated savings or transfer them to another fund, which would include one of the commercial preservation funds.

Before doing this, employees will be required to seek advice from a retirement

Abenefits counsellor. These are more modest figures than financial advisers with their Breitling watches and private jets. They won’t earn commissions. In fact they are not offering “advice” in the legal sense, just explanation of risks, costs and charges relating to the fund’s investment options.

The default that will affect most people is the investment default, which will determine where the contributions of in-service members will be invested. Before treasury and the registrar of pensions pass these defaults they will need to be simple, cost-effective, transparent, value for money and well communicated to members. There will be more complex options for anyone who opts out of the default.

But you can’t go wrong with a simple balanced fund that compounds over several decades.

Life annuities are binding

I used to be a big supporter of wide investment choice. Now I consider that choice is a marginal issue, with the exception of Muslim-friendly Shariah funds that must be offered. I was surprised to see that performance fees will be allowed in the default portfolios, though limits will be imposed. But in a somewhat shameless dig at the Sanlam Cumulus Echo product, loyalty bonuses will not be allowed.

When it comes to post-retirement annuities, the one-size-fits-all approach can’t apply. Members can get out of an investment or preservation default at any time, but anyone who opts for a life annuity can’t get out. These offer a fixed or escalating pension in which the life office guarantees a pension for life.

These days 90% of people opt for living annuities that provide flexibility, as the drawdown rate can be changed every year. But the downside of living annuities is that the capital can be depleted.

You can’t go wrong with a simple balanced fund that compounds over several decades