Regulations requiring pension funds to set defaults are aimed at guiding you through saving for and buying a pension at retirement. Picture: FLICKR/WOODY HIBBARD
Regulations requiring pension funds to set defaults are aimed at guiding you through saving for and buying a pension at retirement. Picture: FLICKR/WOODY HIBBARD

Amendments to the Pension Funds Act have just come into force, aimed at helping investors ensure they retire with enough money. But many funds have failed to meet the deadline to enact the changes.

The default regulations, as they are called, are the culmination of efforts by Treasury to ensure that South Africans get cheaper retirement products, more education on preserving their savings and counselling on what products to buy when they retire.

The desired outcome is a pensioner who has enough money to live on - unlike the majority of South Africans who currently retire with little or nothing.

However, many funds are not ready to implement new regulations under the Act and have applied for exemptions.

The regulations, which came into force at the beginning of March, oblige funds to establish:

• A default investment option for your savings;

Funds are ready to implement … but there are a few teething issues.

• A default option for preserving your savings if you change employers before you retire and the ability to move your savings to your new employer's fund; and

• A default pension that you can opt into when you retire.

The aim is to ensure that the trustees of your fund assist you to invest appropriately and cost-effectively and that you are encouraged to preserve your savings if you change jobs.

The regulations also oblige funds to give you good advice when you retire and to provide cost-effective and suitable pension options when your fund pays out at retirement.

Despite their having had 18 months to put these measures in place, many funds failed to meet the deadline.

Naheem Essop, specialist analyst in the retirement funds supervision division of the Financial Sector Conduct Authority (FSCA), said 541 funds  — out of about  1,700 active funds — had applied for exemptions from the provisions.

Essop told the Pension Lawyers Association conference held in Sandton this week that it was neither reasonable nor responsible for funds to wait until the last minute to implement the regulations.

According to Essop, the FSCA received 90 applications for exemptions in the 17 months leading up to January 31 2019. Over February, the FSCA received 451 applications and, of these, 318 were lodged in the last week of February and 154 on the last day, he says. On February 28, the online system for filing exemptions crashed.

Many funds also needed to submit rule amendments to the Registrar of Pension Funds in order to make the new defaults effective.

Michael Prinsloo, managing executive for product research & development at Alexander Forbes, said that although funds under their administration had applied for exemptions, Forbes believed the default regulations were a positive development and that once the teething problems had been ironed out, they would have the desired effect for fund members.

"The default regulations are welcomed and active funds have been engaging with them and are ready to implement. However, there are a few teething issues to be expected," he said.

Prinsloo said Alexander Forbes, the biggest administrator of pension funds in SA, was working closely with the FSCA and funds to ensure successful implementation.

Prinsloo said that, once fully implemented, the default regulations would ensure that members had carefully considered and cost-effective options when leaving a fund, retiring or selecting an investment strategy.

He said it was possible that, for many funds, broad compliance was feasible except for one line item in the regulations that they were having difficulty addressing.

"In these cases, funds should have applied for exemption from that aspect, not necessarily from the regulations in totality."

Graham Damant, a partner in Bowmans' Employment and Benefits Practice, told the pension lawyers conference that the regulations were to be welcomed and, if properly applied, would result in better solutions for retirement-fund members.

However, a session he hosted at the conference highlighted various challenges the default regulations present for funds, trustees and administrators, such as the verification requirements for paid-up certificates that need to be issued when a member leaves a fund.

A paid-up certificate shows you the value of your savings when you stop contributing towards the fund. In essence it is the proof of what you have contributed and what is available in the fund.

Prinsloo agrees, citing the same requirement as "potentially onerous" due to the high administration costs required to produce these certificates.

Funds need employers or members to provide all the information so that the certificates can be appropriately completed within the timeframes.

Johan Gouws, head of institutional consulting at Sasfin Wealth, says regulations 37, 38 and 39 of the Pension Funds Act require that the default investment options, along with all the fees and charges, be "simple to understand, reasonable, transparent and competitive, considering the nature of the portfolios".

He adds that when choosing investments, the trustees are obliged to consider both active and passive or index-tracking investment strategies, and the default portfolios and investment strategies will need to be reviewed by your fund on an ongoing basis.

If you do not like the investment options chosen by your trustees, you can opt out of the default and make your own choice.

One of the main reasons for implementing the regulations is so that trustees can negotiate investment and pension options at better rates than those available to an individual purchasing a pension in their personal capacity.

But Essop told the pension lawyer's conference he did not think trustees were making full use of economies of scale and the bargaining power retirement funds have as a result of their size.

Petri Greeff, the head of investment advisory and administration at RisCura, agrees the regulations are positive but says they do present some challenges.

He says the changes force trustees of pension funds to take a "cradle to grave" approach, ensuring that there is a safety net for you throughout your journey to retirement.

"Ultimately, they want to provide a safe journey for members until the end. Too many members aren't retiring with enough money to be able to afford what they deserve in retirement," he says.

The default investment strategy should be designed to ensure you have a good chance of retiring with an income that represents an acceptable percentage of your pre-retirement income and investments - especially towards the end of your retirement.

Counselling to help you decide

• It is somewhat misleading to refer to the pension your fund's trustees will make available at retirement as a default annuity, because you have to actually opt in to get the pension set up by your fund's trustees.

It is widely expected that many, if not most, funds will offer both a default investment-linked living annuity and a default life annuity that pays a guaranteed annuity for the rest of your life, to cater for the diverse needs and preferences of all their members.

Funds are obliged to offer counselling on your retirement benefits to help you make an educated decision between a living or a life annuity. Counselling can be in person or written. Counsellors will also help you make an informed choice about preserving your benefits.

Make the most of the new regulations

• Take note of communication you receive and keep close tabs on your retirement products. Do not be intimidated by complicated terms and ensure you understand everything, including when you could land in a default strategy, and when you should opt in.

The default options may not always be the most suitable to your unique circumstances. Talking to a retirement benefits counsellor and your financial adviser will help you to identify when the defaults are not suitable and to find appropriate alternatives.

The transparency in the disclosure of all fees on the default options means that with a little effort you can get a clear picture of all the underlying costs of your investments.

Stay abreast of your progress to retirement. When you change jobs and leave a fund, ensure your employer notifies the fund immediately, and be sure to elect whether to preserve or transfer. To take advantage of the new regulations intended to protect members, you should take an active interest in your retirement.