The final retirement fund default regulations, core to Treasury’s retirement reform initiative, were designed to “serve the needs of South Africans better and more fairly than in the past, and as efficiently as possible, by providing more appropriate products”.
A series of discussion papers followed National Treasury’s proposed retirement reform in the 2012 Budget. They set out in great detail all that ailed the prevailing system: excessive choice and complexity, high fees, inappropriate products, confusing tax laws and poor savings habits.
“These papers were epic in length and content, and there was no mistaking their disapproval of industry practices ,” says Jensen.
After a delay, standardised tax rules for pension, provident and RA funds took effect in 2016. Unfortunately, the new laws did not achieve complete harmonisation as provident funds remain exempt from compulsory annuitisation, at least until 1 March 2019.
A year earlier, Treasury had issued Draft Default Regulations – proposals on default options – to tackle some of its other concerns. Default options are automatic choices made on behalf of members who are unable or unwilling to make their own decision. The default options aimed to protect such members from self-serving practices in the industry.
Employees typically face three critical decisions: how to invest their contributions, what to do with their savings when they resign and what do with their savings when they retire. Treasury proposes a default option for each of these circumstances.
The 2015 Draft Portfolio Regulations made some far-reaching proposals, effectively excluding performance fees, alternate asset classes (such as hedge and private equity funds), smooth bonus portfolios and early termination charges from the default portfolio.
“None of these features and products serve long-term investors,” says Jensen.
The draft proposals, which covered all retirement funds, including preservation and retirement annuity funds, also expressed a preference for index investing over active management.
“Not surprisingly,” adds Jensen, “there was considerable push-back from the industry, fearing the loss of its high margin products.”
The revised default regulations, issued in 2016, lacked the punch of the original proposals. Clear rules were replaced by vague principles, and retirement annuity funds and existing default portfolios were exempted from the default portfolio requirements altogether.
The final Default Regulations, gazetted on 25 August 2017 encompass Regulation 37 to 40 of the Pension Funds Act.
The regulations relating to preservation are largely unchanged from the second draft with the default being in-fund preservation. Funds are further required to have an annuity strategy by 1 September 2017 that is “appropriate and suitable for the specific classes of members that will be enrolled into them”.
One positive change, says Jensen, is the scrapping of the exemption on existing default portfolios: all existing funds must now comply with default rules by 1 March 2019.
On the other hand, preservation funds are now also exempt, along with RA funds. “For now, retail savers remain at the mercy of self-serving industry practices,” Jensen adds.
In summary, the default portfolio for pension and provident funds must be “appropriate” for members. It requires clear communication on composition and performance, fees and charges must be “reasonably priced and competitive” and adequately disclosed. The fund must consider both active and passive investment styles, and not permit loyalty or other “complex” fee structures. Members may not be locked in, and the portfolio must be reviewed regularly.
“Given Trustees’ fiduciary duty, we would expect all retirement fund portfolios to meet these very basic requirements already,” says Jensen. “In our opinion, investors are due at least a clear indication of what Treasury deems ‘appropriate’, ‘reasonable and competitive’ and ‘complex’.”
Without guidance, lay trustees will again defer to the interpretation suggested by service providers. Rather than protect savers, the revised draft regulations will then protect the status quo and the industry’s vested interests.
But, while Treasury may have been forced to give in to industry pressure, there is no reason for trustees to do so. Irrespective of what the final draft regulations say, Treasury’s true position on this subject is still public: the first draft sets out exactly what it believed to be industry best practice, and what it deemed to be unacceptable in the default portfolio. This should be the point of reference for trustees who really want to do the right thing for their fund members.
Ambitious retirement reform proposals lose their punch
Anyone who remembers the retirement reforms envisaged in the 2012 Budget will probably be disappointed by the legislation that comes into effect on Friday (September 1) after lobbying from the industry has resulted in the watering down of ambitious proposals, says Tracy Jensen, chief operating officer of 10X Investments.
