Pension funds feel impact as firms weather pandemic
The retirement funds sector in SA has seen significant change in the past few years — with the focus largely on stronger regulation to protect members’ interests. There can be little doubt that the pandemic has also had an impact on the industry.
As a member of the International Organisation of Pension Supervisors, SA participates in global discussions and brings home relevant best practices.
Key trends from the impact of Covid-19 in the pensions fund industry and the changing regulatory landscape include the following:
Financial distress is on the rise among South African employers, and contributions declined at the height of the lockdown.
A Financial Sector Conduct Authority (FSCA) survey in June showed that in nearly 40% of active retirement funds (and 47% if non-employer-related funds are excluded), the employer was in some form of financial distress because either the employer or employee, or both, had approached the fund to ask for a temporary suspension or reduction of retirement contributions.
However, this financial distress should not necessarily be interpreted as financial unsoundness at fund level, given the nature of retirement funds and that most are defined contribution funds.
Defined contribution funds involve employees contributing a selected percentage or portion of their salary each month — with the ultimate retirement benefit dependent on how much the employee and employer have paid into the fund, aswell as market returns and costs.
The sectors hardest hit were manufacturing and services, particularly smaller businesses participating in bargaining council funds or umbrella fund arrangements.
It is clear that the risk to the employer’s future impacts its staff, not only with regard to current income, but also with regard to future retirement savings and security. The overall economic impact will be felt for a long time.
Larger employers mostly managed to pay full salaries and honour their commitments to provide retirement fund benefits.
This was helped by temporary short-term compromises made on the regulatory side, allowing delayed submissions and considering urgent rule changes to allow suspension or reduced deductions and contributions.
These should not create long-term shifts in the manner in which funds are supervised. So far, accessing retirement savings immediately has not been enabled, thereby protecting assets people have already saved — if the employee remains in employment.
This will make the recovery to previous long-term expected income levels easier.
The FSCA has prioritised conduct supervision and the protection of financial customers with the advent of the Treating Customers Fairly principles.
These are a major cornerstone of what we do, and are applicable to all industries, including the retirement funds industry. It is an outcomes-based regulatory and supervisory approach designed to ensure that regulated financial institutions deliver specific, clearly set-out fairness outcomes for financial customers.
As a regulator, the FSCA is becoming more proactive, pre-emptive, intrusive and intensive. This is aimed at enhancing our role as a protector of financial customers.
But the number of retirement funds poses a challenge; there are about 1,500 active funds and 3,500 dormant funds. Supervising dormant funds strains our limited resources. We are, therefore, finalising plans to enable us and the industry to deregister retirement funds that are inactive and genuinely have no members, assets or liabilities.
Sustainable investing has become an issue in SA and globally. As asset owners, retirement funds can use their financial muscle to influence howcompanies and projects approach social, environmental and governance issues. As much as decent retirement benefits are important, there is little point in retiring in a dysfunctional society or wasteland. Covid-19 demonstrated some of these challenges.
A project to benchmark costs and fees in the retirement industry is also under way. Fees, if left unchecked, can erode a significant amount of retirement savings. The 2008 global financial crisis and now Covid-19 demonstrate that high returns are a thing of the past.
However, the question of fees must not be asked in isolation; it is important for funds to understand the value they are getting from the fees they are charged, because not everything that is “cheap” offers value.