Retirement funds negotiate lower-cost pensions
Trustees secure lower institutional rates offered to big investors
Retirement funds are securing pensions at significantly lower costs than those you will be offered as an individual when you need to secure a monthly income after you stop working. These lower costs - anything from 0.6% to 0.9% a year - will give you a higher pension or an inflation-linked income for longer in retirement.
David Gluckman, chairman of Sanlam Umbrella Fund's investment committee and head of special projects at Sanlam Employee Benefits, said funds' default pensions or annuities could save members about one percentage point in costs a year.
Alexander Forbes says its new retirement income product, available as a default annuity option for funds, saves on average 0.63 percentage points on costs when compared to other annuities you, as an individual, can get from other providers.
Funds are reporting these outcomes ahead of the March 2019 effective date for regulations that will force trustees to choose suitable annuities for retirees rather than leaving members to find their own products.
Funds will choose default pensions for
retiring members, but members can still choose their own pension providers.
The regulations are set to disrupt the retirement fund and financial-planning industries. They also oblige funds to set default investment strategies for both pensions drawn from savings - living annuities - and pre-
retirement savings. In addition, funds will be obliged to preserve your savings in the fund when you leave a job unless you request the money be paid out or transferred.
The lower costs on default pensions are a result of trustees securing lower institutional rates offered to larger investors. In addition, if you choose a default pension, trustees are capping the fees payable to financial advisers who advise you on that product, which may also increase your pension income.
Umbrella funds compete
Umbrella funds, home to members from multiple employers, compete for companies' employee benefits business and their default annuities are likely to be another feature on which they will attempt to outdo their rivals.
Anna Siwiak, head of product development at Sanlam Employee Benefits Umbrella Solutions, said a quote she obtained for a pension from R2m invested in the Sanlam Umbrella Fund's living annuity showed it would cost 2.3% a year when the maximum advice fee was applied. This was 0.93 of a percentage point saving a year when compared to a living annuity provided by another investment house.
The costs include an administration fee for the investment platform, an asset management fee and an adviser fee, which in the case of the umbrella fund annuity was capped at 0.86% a year, including VAT, instead of the maximum of 1.14% for the annuity available to individual investors.
Though Sanlam is offering members what is known as an in-fund living annuity - your pension is paid by the fund itself - other large umbrella funds are offering members "outsourced" annuities provided on investment platforms run by the same group that sponsors the fund. However, the trustees can negotiate cheaper "institutional" rates on these annuities.
Michael Prinsloo, executive head of institutional research and product development at Alexander Forbes, said this is why funds can achieve on average a 0.63 percentage point saving by choosing the Alexander Forbes Retirement Income Solution as a default annuity over annuities available in the retail market. The Alexander Forbes Umbrella Fund has yet to set its default annuity
options for next year, but the fund now offers an in-fund annuity with costs that compare favourably with the Retirement Income Solution costs, Prinsloo said.
He said that on R2m invested in either the in-fund annuity offered by the umbrella fund or the default income solution, costs are 0.8% a year for administration and investments, excluding direct offshore exposure and performance fees, and about 1.03% with offshore exposure and performance fees.
Index-tracking, or passively managed portfolios, are also available and cost about 0.3 to 0.35 percentage points a year less.
Prinsloo said Alexander Forbes has also capped the adviser fee.
Katherine Barker, head of Momentum's FundsAtWork umbrella fund, confirmed that the fund was using the Momentum with-profits life annuity as a default annuity but was also saving on costs at institutional rates.
Hugh Hacking, GM for operations at Old Mutual Corporate, said Old Mutual's SuperFund has two default options, a guaranteed with-profit annuity and a living annuity, both provided by Old Mutual. The living annuity's default investment strategy is in Old Mutual's smoothed bonus portfolio, which guarantees 80% of the capital at a cost of 0.7% a year. With this fee, the maximum charge for the annuity is 1.977%, he said.
The default annuity is cheaper as there is no initial fee or advice fee, he said.
Umbrella funds from Sygnia and 10X both use their own annuities, which are invested in index-tracking or passively managed portfolios, as their defaults. Sygnia deputy CEO Dave Hufton said the Sygnia Umbrella Retirement Fund's default annuity comes with the option of converting all or part of savings into a Lifetime Income Protection portfolio, which provides a guaranteed income for life.
Trackers save more
The total investment costs for the annuity using a balanced fund that tracks a variety of indices is 0.64% plus any fee negotiated with your adviser, regardless of whether you buy the annuity through the umbrella fund or as an individual. On the part which you invest in the Lifetime Income portfolio, you will pay an ongoing fee of 1.1% and an initial upfront fee of 1.1%.
Chris Eddy, senior investment analyst at 10X Investments, said the trustees of the 10X umbrella fund have yet to finalise their default annuity, but an individual taking out an annuity with 10X invested in passively managed funds would pay fees on a sliding scale starting at 0.86% on R2m.
Eddy said if 10X Investments is appointed as a default annuity provider, the cost is 0.50% - a saving of 0.36 percentage points.
Neither Discovery nor Allan Gray umbrella funds have decided on their default annuity.
Daniel van Andel, a product development manager at Allan Gray, said institutional rates are similar regardless of whether the annuities come from within the fund or are outsourced to an investment platform.
What is an annuity?
Pension fund and retirement annuity fund members are obliged to purchase an annuity with two-thirds of their savings at retirement. In return for your investment, you receive a monthly pension.
You can choose a guaranteed or life annuity that pays a predetermined income for the rest of your life.
Alternatively, you can invest in a living annuity, choosing the investments and taking your chances on the returns you will earn.
You may draw an income of between 2.5% and 17.5% a year from your investments.
What you must know about default annuities
From March next year, your retirement fund must provide a default annuity or pension option when you retire, one that the trustees deem suitable for you. The default option can only have a choice of four underlying investments and the trustees must take into account the costs of the pension.
Your retirement fund can offer this pension from within the fund or out of fund. The differences are:
• Your investments must comply with regulation 28 of the Pension Funds Act, which effectively means you cannot invest more than 75% of your savings in equities and listed property and you are limited to investing up to 30% of your savings offshore.
• When you die, the trustees of the fund will make the final decision on how to allocate any remaining funds in your living annuity.
l Your living annuity investments do not need to comply with regulation 28.
• You can nominate the beneficiaries of any remaining funds in your living annuity after you die.
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Correction: October 15 2018
This article was amended to indicate that Katherine Barker, head of Momentum's FundsAtWork umbrella fund, had confirmed that the fund was using the Momentum with-profits life annuity and not the Momentum living annuity as an earlier version of this article stated.