Shift helps preserve pension fund benefits
SMOOTH: UMBRELLA FUNDS HELP RETIREES AVOID DELAYS AND CHARGES
The right investment platform allows flexibility in a cost-effective and efficient manner.
The final default regulations for retirement funds, ensuring members of retirement funds receive good value for money and retire comfortably, took effect on September 1, 2017.
As a result there has been a large-scale shift from stand-alone pension funds to large umbrella funds. An umbrella fund houses the retirement benefits of employees working for various unrelated firms in a single fund, reducing costs through benefits of scale.
Sasfin Wealth’s Johan Gouws says a well-designed umbrella fund offers members a single solution for all their retirement needs. “This allows for a smooth transition between retirement options, pre- and post-retirement, and for the avoidance of any unnecessary administrative complexities, delays and charges.”
While the implementation of defaults is expected to have an impact on the industry, Gouws says the post-retirement implications are particularly significant, given that trustees will need to cater for living and life annuity options. The options can either be provided on an in-fund basis or involve a third-party provider.
Through ongoing reform efforts, regulators are reducing the costs of retirement solutions, discouraging investors from cashing in their retirement benefits when they change jobs and ensuring there is continuity with regard to the investment solutions through a member’s lifetime, Gouws says.
The decision not to preserve retirement benefits when changing jobs is arguably the main reason most South Africans can’t sustain their lifestyle in retirement.
Retirement funds that compel members to enrol as a condition of employment were obliged to change their rules to allow for default preservation. Although employees are still allowed to withdraw their benefits, the funds will automatically be preserved if they don’t choose this option.
While the savings and retirement life cycle used to be a fairly seamless process in the defined benefit space, the move to a defined contribution environment – where members carry the investment and longevity risk – has created a much more fragmented situation. Moreover, members tend to switch between employers more often and cash out their benefits. Even where benefits are transferred to a preservation fund it may involve additional costs and changing investment options.
But the changing landscape and increased regulation have also placed a much greater responsibility on trustees to ensure members are well looked after throughout their working life and during retirement.
Gouws believes the best way to address the current challenges is to choose the right investment platform that allows flexibility of investments in a cost-effective and efficient manner.
It should also allow members to invest their retirement contribution pre-retirement and to draw an income in retirement without having to switch between investment administration and product providers.
This allows pension fund members to plan for their retirement in a consistent manner from the day they start saving, without having to change course once they reach retirement.