Default options makes it easier to preserve retirement funds
Johannesburg - From this past Friday, all defined contribution retirement funds are required to offer a default preservation fund.
A member can still withdraw their retirement fund when changing jobs, but this makes the investment choice far easier if you wish to keep your funds intact for retirement.
From this month, a company retirement fund will provide resigning workers with the option to leave their accumulated retirement savings in the fund.
According to National Treasury, although the employee will have the right to withdraw their funds, they will be required to seek “retirement benefits counselling” before they make a decision.
When National Treasury issued the first retirement reform paper in July 2015, it identified that one of the main reasons people did not have sufficient money when they retired was because many did not preserve their funds when they changed jobs.
Rather than introduce mandatory preservation, National Treasury recommended changes to company retirement funds that make it easier for members to preserve their money.
It also ensures members get financial advice before withdrawing funds.
There has been an increase in preservation rates of retirement funds where a default preservation rate already exists and where employees were required to get advice before withdrawing the money.
Unfortunately, the reality for most employees is that it is often easier for them to take the cash withdrawal rather than navigate the world of retail investing.
Retail preservation funds also tend to be more expensive compared with the fees paid by a company fund.
As human nature tends to follow the course of least resistance, or least effort, there could be an increase in overall preservation rates just because it’s easier to leave your retirement fund to grow rather than withdraw it.
Default investment portfolios for company retirement funds are also now required by law, which means that the retirement fund must have a default investment portfolio that is appropriate, reasonably priced, offers good value for money and is well communicated to members.
A fund can still offer a range of investment portfolios, but, if no selection is made, the member will move into the default investment option.
Treasury also wanted to introduce a default annuity strategy on retirement, making it easier and less expensive for individuals to purchase an annuity.
However, a life annuity, once chosen or defaulted into, becomes irreversible, so Treasury elected for what David Gluckman of Sanlam Umbrella Funds describes as a “trustee-endorsed annuity strategy”.
What this means is that the trustees of the fund need to make a recommendation to their members on their annuity income in retirement.
This could be a living annuity or life annuity, or a hybrid option.
Considering the complexity around annuities, this endorsed annuity should make it easier for members when it comes to making decisions around their retirement income.
A company fund selected annuity should provide for a cost saving as the retirement fund would have economies of scale, negotiating for better investment rates than the member would receive if selecting the annuity as a retail client.
It also means that members are more likely to obtain advice before making a decision about their annuity income.
As Gluckman explains, if a member does not elect an annuity on retirement from the company, the retirement benefits will remain in the fund until the member makes a decision to retire from the fund itself and select the appropriate annuity.
This is an advantage to individuals who may be retiring from a company, but plan to work after retirement and do not require their retirement income.
By leaving their money in the retirement fund, it can continue grow until they need it.
It is important to note that these changes do not apply to the Government Employees’ Pension Fund, which has its own set of rules.