Pension fund defaults should not detract from individual retirement planning for members
The introduction of default in-fund options within retirement funds is a positive step towards ensuring that it costs less for pension fund members to transition into their financial retirement products, though this should not detract from holistic retirement planning – an element which is still largely lacking for millions of South Africans.
Sabir Bacus, Employee Benefits Consultant at leading financial advisory firm GTC, believes that while default regulations are likely to help many fund members, the industry, trustees and employers should actively promote and encourage members to take a real interest in their retirement fund and not simply revert to default options as the solution to their retirement needs.
The National Treasury has introduced regulations – which must be implemented across all funds by 1 March 2019 – whereby all retirement funds must provide default in-fund options for investment, preservation and annuity strategies, best suited for the fund’s members. These regulations form part of a broad range of measures announced over the past few years, aimed at minimising costs and thereby improving retirement outcomes for members.
“These regulatory changes should encourage more members to preserve their retirement benefits upon leaving employment, as they will be provided with an option recommended by their board of trustees, relieving some of the pressure associated with deciding on appropriate alternative investment, preservation and annuity options themselves, which have, up to now, been independent of the retirement fund,” says Bacus.
While these options will undoubtedly help some members, he cautions that it should not be seen as an alternative to professional retirement planning.
“We cannot emphasise enough that every individual’s optimal retirement outcome is different and will therefore be achieved differently. This is determined by a number of factors, including one’s future needs, liabilities, risk appetite, current means and ability to work up to and beyond stipulated retirement age.”
He explains: “Default options are selected according to their suitability for the wide range of pension fund members, based upon their specific fund’s demographic data. Boards of trustees elect options they deem most suitable for the members they represent. However, even with the best information available to them – and best intentions – trustees cannot guarantee an optimal outcome for every member according to the requirements of each of their individual needs.”
It is especially challenging for trustees of umbrella funds – where several diverse participating employers are housed in a single fund structure – to decide on an appropriate option for a wide diversity of members.
According to Bacus, there is concern that the availability of default options could cause increased complacency amongst members, relying solely on trustees’ in-fund choices.
“It is understandable that many members may suffer from ‘decision fatigue’ due to the number of choices they must make relating to several aspects of their financial planning. For others, the retirement landscape is still too daunting and complex to understand, so they may opt for the course of least resistance and rely on their trustees’ choices,” he says.
“If an option is pre-selected for members, these same members are less likely to apply the same degree of research and interrogation they would otherwise have undertaken, adopting the view that the default must obviously be the best option for them. However, while the default option should not lead to a poor cost outcome, it is very likely that an optimal financial planning outcome would be best achieved with the assistance of a professional financial advisor.
It is an unfortunate reality that many retirement fund members still naïvely believe their monthly pension fund contributions are sufficient to meet their retirement needs.
“In recent years there have been significant moves, both regulatory and industry practice, towards empowering retirement fund members with the knowledge to understand their retirement fund benefits, yet many members still fail to take an active interest in what is in all likelihood their most important contractual savings” he says.
Retirement fund regulation has seen evolving industry reform in the form of the introduction of: principles regarding treating customers fairly, transparency on fees and investment selection, as well as greater accountability on the part of trustees – to name a few.
“While this has indeed helped, it is unwise for members to solely rely on trustees to deliver retirement outcomes which may be better suited to the broad base of a fund’s members’ needs and goals. There is no perfect science to choosing a suitable default option for a fund, especially considering the possible biases identified in behavioural investing which trustees may harbour – such as an overly conservative outlook – which may influence their decision-making process,” says Bacus.
Other possible detracting influences on trustees’ decision-making may include an over-reliance on strategies or managers that have delivered good performance in the past and choosing strategies that are popular among many other retirement funds at a particular time in the investment cycle.
Bacus also welcomes the regulatory introduction of compulsory counselling for members upon retirement or resignation, but believes that proper financial advice should be offered at the start of a career, coupled with ongoing and regular assessments.
“There should be a much greater focus on holistic financial planning from early in an employee’s working life. This would ensure that one’s retirement funding is optimised relative to one’s retirement plan.”
He concludes: “Default options are a great start to achieving better retirement outcomes for pension fund members, and definitely have the benefits of low costs and familiarity of investment portfolios. Members also need to take responsibility for optimising their own retirement funding. A comprehensive financial plan at a younger age would encourage members to take ownership of their retirement benefits and actively choose their investment options throughout their life stages.
Members must also appreciate that an occupational retirement fund is only one element of a holistic long-term financial plan, which ought to be complemented by other investments aimed at remedying shortfalls and satisfying their individual strategy – based upon their unique circumstances and goals.”