Regulations to the Pension Fund Act, gazetted in August 2017, are set to have far-reaching implications for almost all participants to the pension or provident fund value-chain.  

Both trustees and funds are working hard to ensure regulatory compliance by 1 March 2019. The review of how intermediaries receive remuneration (RDR) for financial advice removes many of their services from employees, creating a perfect storm for disruption. Many believe that this could be the “Uber” moment for retirement savings plans, and many financial advisors could be simply “disintermediated” via the default and continuation options that Trustees will be obligated to provide to their members.

These rules are intended to provide better and more cost-effective preservation and retirement options for fund members, but effectively also means that Trustees will be obligated to provide fund members with both pre-and post-retirement fund counselling and appropriate solutions to fill the gap. The outcome should be cheaper and easier to understand savings solutions but there may be unintended consequences.

So what are these changes all about?

The three largest changes include:

• Default investment portfolios for employees;
• Obligations for funds and Trustees to provide departing members with “continuation options”; and
• Funds and Trustees must ensure that their fund has an annuity strategy.

But what do these changes practically entail?

Default Investment Portfolios for Employees

The Boards and Trustees of pension/preservation and retirement annuity funds must include in their investment policy statement, the provision of one or more default investment portfolios. This includes making the objectives, the underlying asset allocation, all fees and charges and any expected risks and returns available to all members.

The Board also has the requirement to ensure that:

• The composition of the underlying assets and performance of the default options are adequately communicated to members;
• The default options are adequately priced and deemed competitive. The amendments are not imposing fee limits like in the UK where “auto enrolment” became compulsory for UK citizens;
• Both passive and active investment strategies are considered in default portfolios;
• No loyalty bonuses are permissible;
• In the event that a pension/provident fund member changes jobs, they will be permitted to remain invested in the default investment portfolio and continue to benefit from the fees that the fund offers; and
• Their members have access to “counsel” to assist them in making decisions on both pre-and post-retirement options.

Annuity strategy

The Boards of all pension, pension preservation and retirement annuity funds must now establish an annuity strategy.

Under this strategy these funds must show:

• The level of income that will be payable to retiring members;
• The investment, inflation and other risks inherent in the income received by retiring members; and
• The level of income protection granted to beneficiaries in the event of a death of a member enrolled in the proposed annuity.

In addition, these annuities must have reasonable and competitive fees and charges. Members must be given access to retirement benefits counselling, and the annuity strategy must be reviewed annually.

The complexity of these annuity strategies could potentially be difficult to navigate and implement.

New investment policies. Who are likely to be the winners and losers?

The hope is that these regulations create better retirement outcomes for South Africans by encouraging them to continue to save when changing jobs (rather than cashing in) and making better retirement investment decisions. Over the longer term this should mean larger assets per member needing advice, but in the interim some of these services will dry

Clearly, these changes play somewhat into the hands of various pension fund consultants who will have to work alongside pension and provident funds to amend their investment policies and frameworks accordingly and would look to populate their own preservation and annuity solutions.. Bear in mind, pension fund consultants were recently castigated by the UK’s Financial Conduct Authority (FCA) and the big three consultants were referred to the Competitions and Markets Authority – a first ever for the FCA. In its working paper, these competitive processes were cited as not providing customers with the necessary information to judge the value for money of investment consultants and between fiduciary managers. The big three consultants have denounced the FCA report as being “flawed”.

This brings into consideration multiple permutations of outcomes for financial advisors, investment administrators and asset managers. Does this mean that “the old-world order”, where financial advisors “re-brokered” preservation funds when members resigned from an employer will dry up, as these will now be captured at the source by some form of “Uber” auto-preservation fund option? The intention is that the existing savings will follow the member, thus remaining in the institutional rather than leaking to the retail investment environment.

Retirees will now be able to purchase their annuity option within their workplace, rather than seek advice in the open market from a trusted advisor? This could mean that fund managers that are not on pension fund consultants “fund buy lists” will be crowded out from a world where there has, historically, been free flow of assets between pension fund accumulation and de-accumulation. What will this do to small sub-economic investment management firms and will they simply disappear due to buying biases towards large investment brands? The silver lining is that emergent black managers who have secured institutional mandates but struggle to attract retail clients may be given a life line.

The potential scenarios and ramifications of these changes are vast and needs to be front of mind for the asset management industry as investment managers will need to consider their strategic options to ensure they remain relevant in a changing world of pension fund order.