Scott Bell
Provincial Senior Manager: Retail
Alexforbes
Pairing information with advice can significantly improve retirement outcomes for individuals
Clock5 minutes

The retirement funds default regulations, expected to be implemented on 1 March 2019, are designed to guide members towards better retirement outcomes. We have heard the statistics before: “The average South African retires with a pension less than 20% of their final salary,” and, “less than nine percent of South Africans preserve their retirement fund when they leave their job”. These aren’t great numbers for a country that doesn’t have an effective social security safety net. We therefore need to assist members of retirement funds to make better financial decisions while they are still working.

The default regulations include:

  • Retirement Benefit Counselling (RBC)
  • Annuity Strategy
  • Default Investment Strategy
  • Default Preservation and Portability Rules

The implementation of these default regulations could have consequences to financial advisers as they question if they still have a role to play, given the involvement of trustees in the decision-making process.

However, it is because of this intent that the provision of advice will become more important. Just because there is a default investment strategy in place, doesn’t mean members will see an improvement in their outcomes at retirement. We have seen versions of this before, with portfolios aligned to members age groups being implemented to assist members in looking after their capital as they approach retirement. However, this didn’t have the desired result.

The implementation of default annuity strategies may also result in the adoption by Trustees of the most popular choices, not the most applicable to members. A recent survey by Just SA reported that 89% of South Africans want a guaranteed income for life, while 53% wanted to leave an inheritance or a form of legacy. Against this, 92% of annuities bought are Living Annuities, which only answers the legacy aspect.

RBC regulations require that counselling is made available to members:

  • When they join a new employer
  • When they resign
  • At least three months before a member’s normal retirement age

Sadly, the regulations only go so far as to state that information must be made available at these times and this can include pamphlets and other factual information. The industry has made information available to members for a number of years, with little change in behaviour. The definition of insanity is to continue doing the same thing, and expect a different outcome.

The way to make a meaningful change to the retirement outcomes of members is through offering Retirement Benefit Counselling and advice at an individual level. In fact, the only way the implementation of the default regulations will work is through an advice-led process. Trustees are not equipped to guide members towards solutions that will suit their individual needs. They can, however, partner with an advisory firm to give effect to their strategies. An effective financial plan that has the member as an active participant, can add up to 3% per annum alpha.

Advisers and firms will need to revisit their practice models with the Retail Distribution Review. The previous model of advisers cherry-picking clients based on their asset value can be replaced by retainers, or Service Level Agreements (SLA) paid by the fund or employer. In this way the advice can be dispensed to all members of the fund, without the member having to be concerned whether the adviser has their best interest at heart. By implementing the SLA, the fund knows that their members are receiving quality advice and advisers have comfort in the knowledge that they will be remunerated for their advice, and not on the sale of a product.

It is hoped that, through the RBC process we are able to see significant changes in members’ retirement benefits, leveraged with individuals receiving quality advice from a reputable adviser.

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Retirement