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Regular reviews of the South African financial services sector’s regulatory framework is essential to ensure the system remains resilient and problem areas are addressed, according to Teboho Tlooko, principal officer for the PPS New Generation Retirement Fund.
A good example of review with the intention to improve is the recently approved Retirement Funds Default Regulations, says Tlooko, who explains that the aim of these regulations is to introduce further measures to ensure that members of retirement funds receive better value for their savings and can retire comfortably.
“A serious issue in the current system, is the reality that only 6% of South Africans are financially independent when they retire. South Africans are simply not saving enough for retirement,” says Tlooko.
Default preservation option
He adds that one of the main reasons many South Africans have insufficient savings in place at the time of retirement, is the tendency to withdraw and spend retirement savings when changing jobs.
“Preservation is a far better option. Savings continue to grow without interruption and one avoids paying tax by not withdrawing, so compound interest continues to accrue on the full value of the current retirement savings account,” explains Tlooko.
The default regulations encourage more members to preserve, by making it compulsory in certain instances, for retirement funds to offer a default in-fund preservation fund to members who resign.
"This means preservation becomes the much more feasible default for the majority of funds and benefits are only paid out if the member explicitly instructs the fund to pay the benefit or transfer it to another fund,” he says.
The regulations also stipulate that members must have access to retirement benefits counselling before any withdrawal is paid or any transfer is made to another fund, to ensure that they understand the impact that withdrawing their savings will have on their final retirement benefit.
“The intention is to promote the portability of benefits, so as to make it easier to keep retirement savings intact when changing jobs,” adds Tlooko.
Default investment portfolio
Although members of defined contribution retirement funds carry the risk of poor investment performance, many are ill-equipped to decide where to invest their savings, according to Tlooko.
“The regulations require that all defined contribution retirement funds make provision for at least one suitable default investment portfolio."
This means that the retirement savings of members who fail to exercise the choice of an investment portfolio can be channelled to this option automatically.
Default annuity strategy
The third aspect of the regulations focuses on retiring members.
“Many retiring members expose themselves to market volatility as well as the risk of outliving their pension when selecting an annuity option. In terms of the regulations, members need to ‘pre-select’ which type of annuity should be paid and must have access to counselling to assist them in making an informed decision,” he says.
In his view, the common theme underpinning the regulations is that default options need to be appropriate, transparent, reasonably priced, offer good value and must be well-communicated.
These principles reflect the requirements of treating customers fairly and providing a consumer protection framework for creating better financial outcomes.
“Members should expect their retirement funds to provide clear, understandable information on these regulations and what their fund is doing to comply. Ultimately, the regulations are good news, as they are intended to facilitate decisions that result in better retirement outcomes,” Tlooko concludes.
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