Regulations oblige all retirement fund trustees to choose investments that are appropriate for the members, reasonably priced and competitive.

Your best bet when changing jobs may be to preserve your retirement savings in your existing fund or move it to your new employer's fund. But ideally you must, or get your adviser to do a cost-benefit analysis. Picture: 123RF
Your best bet when changing jobs may be to preserve your retirement savings in your existing fund or move it to your new employer's fund. But ideally you must, or get your adviser to do a cost-benefit analysis. Picture: 123RF

New regulations under the Pension Funds Act are forcing retirement fund trustees to choose more cost-effective investments and annuities as their defaults, a workshop with some of the country’s larger umbrella funds has revealed.

And their default investment and pension options have some independent financial advisers worried about the competition.

Default investments for members who preserve their savings when leaving an employer are likely to provide some competitive alternatives to retirement annuities and preservation funds offered at “retail” rates.

But you will have to navigate your choices and your relationship with your adviser carefully.

Large umbrella funds are using their institutional investment fees as well as index-tracking or passive investments to lower the costs on default and trustee-endorsed investments and annuities, fund administrators revealed to a small group of advisers who attended a SA Independent Financial Advisers Association (SAIFAA) workshop recently.

The so-called default regulations that became effective on March 1 this year oblige all retirement fund trustees to choose investments that are appropriate for the members, reasonably priced and competitive.

The trustees must disclose all costs, cannot use investments with complex or opaque charges, must consider both active and passive investments and must disclose performance relative to an appropriate benchmark over at least three years.

Fees on default investments revealed in the presentations by Sanlam, Liberty, Momentum, Alexander Forbes and Discovery ranged from 0.35% to 1.4% depending on whether the investment option was passively managed, actively managed or a blend of the two.

On the Sanlam Umbrella Fund, for example, your employer can select a default investment option that invests in the passively managed Satrix Enhanced Balanced Fund, at a cost that depends on the investment size of between 0.57% to 0.68% including the fund administration fee but excluding an advice fee. This is also one of the options open to you to preserve your savings in the fund when you leave an employer that has chosen this umbrella fund.

Members who choose their own investment options will be allowed to remain on that option if, on leaving an employer, they preserve their savings in the fund.

Currently most members do not preserve. They cash in their savings, incurring additional tax and seriously compromising their ability to generate a decent income in retirement. But the government and the retirement fund industry hope that this will improve as the new regulations also compel funds to counsel you on your options when you leave a fund or retire.

Among the few members who do preserve when changing jobs, most end up in retirement annuities or preservation funds, typically on the advice of advisers.

SAIFAA CEO Derek Smorenburg says advisers typically recommend only a carefully selected range of financial products, which have been subjected to a rigorous due diligence.

The new investment defaults mean your best bet may be to preserve in your existing employer-sponsored or umbrella fund or to move to a new employer’s fund or umbrella fund, but it will be difficult for your adviser to do the necessary due diligence as there are some 1,700 active retirement funds in SA many with multiple default options.

While some umbrella funds expect your employer to appoint an adviser and some will provide a panel of approved advisers, most of the umbrella funds have chosen to allow members to appoint their own financial advisers.

However, your adviser will have to have the appropriate accreditation and many umbrella funds limit the fee that advisers can charge for advice on investments that remain in their funds.

Shakeel Singh, CEO at Sanlam Umbrella Fund Solutions, told SAIFAA members that advisers giving advice on retail or individual products can earn higher fees, but as the investment options in an umbrella fund are limited, the trustees are comfortable the limited fees are adequate for the work involved.

Only about 80 financial advisers attended the SAIFAA presentations and if you want to know which option is in your best interests, you may have to prompt your adviser to do the analysis for you.

If you are moving to a new employer, this exercise should ideally involve a comparison of your existing fund, your new employer’s fund and the retirement annuity and preservation fund options your adviser recommends.

Former financial planner of the year Wouter Fourie warned fellow financial advisers at the SAIFAA workshops that a recent Actuarial Society of SA survey found that when it came to choosing default annuities, cost was a key focus for both trustees and members.

He says advisers will need their “A-game when it comes to explaining their fees, particularly in volatile and bear markets, as the lure of low-cost self-served alternatives continues to grow’’.

Costs are important but should not be your only focus. Higher costs for consistently better performance may be worth paying for and your funds’ governance, services and cybersecurity are also worth considering.

You should also not ignore the value a trusted adviser can create for you by giving comprehensive advice that integrates all your circumstances and investments and includes tax and estate planning, Fourie says.

However, he says SAIFAA should assist advisers to get access to umbrella fund members’ details on an electronic investment and insurance information exchange and to negotiate institutional investment rates for advisers’ clients.

Fourie says SAIFAA would also like to engage with the financial services regulator, the Financial Sector Conduct Authority, about the fact that advisers who are tied agents — selling one company’s financial products only — can get access to institutional investment rates on retirement products but independent advisers do not.

Most umbrella funds presenting at the SAIFAA workshops said their default investment and preservation options make use of a life-staging model. This means as you approach retirement your investments will automatically be moved from higher exposure to risky assets such as equities and listed property to lower exposure to these asset classes.

Momentum’s Funds at Work Umbrella Fund will start moving your investments seven years before retirement, Sanlam six years, Alexander Forbes five years and Allan Gray three years before retirement.

Discovery’s umbrella fund makes use of target dated funds — funds designed for specific retirement date ranges.

If your retirement date changes when you change employers or if you plan to continue working after your employer’s retirement date, you need to be aware of the consequences that investing too conservatively too early can have on your investments.