Regulation 39: boards versus financial advisers in providing financial advice
Regulation 39 will help a member to understand available annuity strategy options, but does not intend to offer financial advice needed to ensure they fully understand all relevant factors
Three new pension regulations, colloquially dubbed “the default regulations”, came into effect on March 1. Regulation 39 specifically provides for retirement funds to establish an annuity strategy. It requires all pension, pension preservation and retirement annuity funds, unless exempted, to have a strategy giving members the opportunity to elect a retirement income solution tailor-made to their needs.
Provident funds and provident preservation funds are excluded from complying with this regulation unless their rules allow a member to elect an annuity. The regulation aims to provide cost-effective, suitable annuities to protect members at retirement or in the de-accumulation phase.
Before the implementation of Regulation 39, boards of funds did not necessarily take an active role in protecting a member’s retirement benefit. In effect, members who were entitled to an outsourced annuity of their choice, depending on the rules, would need financial advice to ensure the correct product was purchased. Alternatively, in obtaining an annuity, the fund would not necessarily look at members’ individual needs, but at the membership as a whole.
This model has not been successful. Regulation 39 is an express legal obligation on boards to assist retiring members with solutions aimed at achieving a sustainable retirement income.
The board’s duties and obligations in determining an annuity strategy are now focused, requiring specific considerations and achieving clear objectives. This raises the question of the role of financial advisers in the annuity strategy environment.
Boards have a duty to ensure the annuity strategy protects members’ retirement benefits and provides a suitable income. They must ensure the adopted annuity strategy includes annuities that are appropriate for members. They must consider factors such as the level of income payable to a retiring member and the investment and risks in the income. They must assist members with financial decision-making on retirement.
Another requirement of Regulation 39 is access to retirement benefits counselling. The counselling must include full disclosure and explanation, in a clear and understandable language, of risks, costs and charges, as well as the terms of the fund’s annuity strategy and other options available to members.
At first glance it appears that Regulation 39 has made the need for members to seek their own financial advice obsolete. The legal requirements of boards appears to have taken over the role of financial advice, in that the objective of Regulation 39 is to put an annuity strategy in place that protects a member’s benefit after retirement. Boards appear to be called upon to consider the same or similar factors which financial advisers would when providing advice to retiring members on the best available annuity products.
The role of financial advice appears further diminished when considering the requirement of making retirement benefits counselling available. However, the role of financial advice is very much alive in the annuity strategy environment.
A retiring member will likely still need financial advice to decide on the value of the lump sum, if any, at retirement. In addition, the annuity strategy is not one of default — a retiring member is still required to make an individual choice on available options. This too will require financial advice.
Although the strategy adopted by the board must consider individual circumstances, it is unlikely to extend to a more comprehensive analysis of a member’s holistic retirement planning. A member’s full investment portfolio, likely to drive the choices they make, will continue to require financial advice.
It is clear from the FSCA guidance note that access to retirement benefits counselling does not amount to advice. As such, it is likely that a retiring member will still require financial advice when making important financial decisions. Retirement benefits counselling, under the current regime, does not amount to advice and though it may be sufficient for some retiring members, is unlikely to be sufficient for more sophisticated retiring members.
In short, Regulation 39 will likely assist a member in understanding their available annuity strategy options, but does not intend to provide the financial advice needed to ensure the retiring member fully understands all relevant factors when deciding on an annuity. The regulation does not appear to discount the need for financial advice but rather, in our view, seeks to assist members with understanding the options available when considering an annuity.
• David and Yuda work at Norton Rose Fulbright SA