Articles about saving for retirement in South Africa almost always quote some terrifying statistic, like only 7% of South Africa can retire comfortably. The idea seems to be to scare members of retirement funds and discretionary investors into doing more to ensure their long-term financial security.
The default regulations implemented on 1 March aim to make it easier.
Articles about saving for retirement in South Africa almost always quote some terrifying statistic, like only 7% of South Africa can retire comfortably. The idea seems to be to scare members of retirement funds and discretionary investors into doing more to ensure their long-term financial security.
This doesn't, however, seem to be achieving much. The figures for how many South Africans are likely to be able to retire comfortably https://www.moneyweb.co.za/mymoney/moneyweb-financial-planning/6-south-africans-can-retire-comfortably/are not improving.
As the financial services industry we should perhaps rather consider that we have a retirement savings problem not because people are stupid or reckless with their money, but because the environment that they are being asked to navigate is hard. It is our duty to make it easier for them.
This is essentially what informs the new default regulations for retirement funds that will come into effect on 1 March 2019. They will simplify the retirement landscape, ask members of retirement funds to make fewer decisions, and give them better value for money. This should go a long way to improving retirement outcomes for members (and those dreaded statistics).
Default investment portfolios
The first of the new regulations requires all defined contribution retirement funds to offer default investment portfolios. This means that anyone who does not specifically choose their own portfolio will automatically be placed in one that the board of trustees has decided is most appropriate.
This makes things much easier for anybody starting a new job and joining their employer's retirement fund, since making these decisions without advice can be complicated and intimidating.
In practice, most funds offer default portfolios already, but under the new regulations trustees must consider both active and passive strategies, and ensure that all costs are disclosed. Members should check that their hard-earned money is not being eroded by unnecessarily high fees. A reduction of fees and charges from 2.50% to 0.50% of assets, over a 40-year period, will result in a 60% higher benefit at retirement according to a paper produced by National Treasury in 2013.
Default preservation
One of the biggest reasons that so many South Africans struggle to accumulate enough for their retirement is that they withdraw their savings when they leave an employer. Often they see this as a windfall to be spent.
While sometimes it does meet pressing needs, like paying off debt or simply putting food on the table due to a lack of employment opportunities, spending retirement savings has a massive impact on anyone's ability to reach their goals. Not only does it mean that they have to start again from zero, but future interest is also lost.
Under the new regulations, however, anybody leaving an employer will automatically be considered a 'paid-up' member in the fund. Their money will stay within the fund unless they specifically request otherwise.
When joining a new employer, their new retirement fund will also have to offer them the option of bringing across any 'paid-up' money from other funds. This means that retirement savings can now easily follow members from employer to employer, and these transfers must be done for free.
Recommended annuity strategies and retirement benefits counselling
Perhaps the most difficult decisions members have to make with their retirement savings are what to do with their capital when they reach retirement age. From 1 March 2019, every retirement fund will now also have to offer members an annuity option that has been approved by the trustees. This means that when anyone retires from the fund there is an annuity option available to them.
All funds are also required to provide 'retirement benefits counselling' to their members to help them make informed choices. This is not advice, as recommendations cannot be made, but it must give details to members about their options in a clear and understandable way. This counselling may be in writing, over the phone, or face-to-face.
Ultimately these new regulations are trying to make the retirement journey much easier for South Africans. After 1 March, it will now be possible for anyone to go from starting their career to retiring without ever having to make a difficult choice.
They can automatically be placed into their fund's default investment portfolio; their money can follow them from one employer's fund to the next; and when they retire they can get an income through the annuity strategy their fund has already put in place. This does not mean that we in the industry think people aren't capable of choosing to do otherwise. We just recognise that we can make it a whole lot easier.