Retirement Reform – A much easier sell
Simplicity, transparency and flexibility are hallmarks of National Treasury’s principles-based approach to pensions preservation.
Allan Greenblo, Editorial Director
The first draft of amendments to push retirement-fund reform was largely drawn and driven by Dave McCarthy, then engaged as a consultant to National Treasury. It caused widespread angst, not only within the industry but also amongst labour unions. The second draft, were McCarthy to see it from wherever he now resides, might cause him to tear his hair.
Between the time of the first draft in 2015 and the second released late last year, which invited further public comment, consultations have been exhaustive and clearly proved constructive. The upshot is that, in some key respects, the first and second drafts are poles apart.
No longer are there blunt tools for mandatory preservation, the mere term having been inflammatory, or a banging-on about the dominant virtues of passive investment, to the exclusion of active’s merits. Neither have performance fees been relegated to the scrapheap.
The second draft is a gentler attempt to encourage, rather than impose, preservation of pension pots. For implementation, there’s greater flexibility and a marked switch in emphasis from prescriptions to principles.
True, the second draft has much to say about default options for members on exiting a fund. Taking lump sums in cash is not amongst these options. Rather, unsaid but not to be underestimated, the provision of defaults stimulates preservation because members are generally too lethargic not to accept the choices selected for them.
As the explanatory memorandum of National Treasury puts it, the draft default regulations:
- Broadly and mainly seek to standardise and simplify, where appropriate, the default investment portfolios into which members are enrolled during the accumulation phase, with the aim of promoting transparency and reducing costs;
- Aim to protect members in the de-accumulation phase by providing them with cost-effective and suitable annuities;
- Encourage preservation when members change jobs, which is critical in assisting members to retire with decent retirement savings.
To achieve these objectives, heavy reliance is placed on the boards of retirement funds. In the front line to help “facilitate better and appropriate decision-making by members” would be trustees, perhaps not too grateful for a further addition to their duties and perhaps not universally too competent to perform them either.
They have to provide “retirement benefits counselling” that will give funds a discretion on how information is provided to members. The term “retirement benefits counsellor” having been dropped, to distinguish between information and advice, doesn’t solve the problem of who’ll provide and pay for the advice that members might still need.
Neither does the memorandum say that members can cash-out, on leaving a fund, if they want. Heaven forbid that this should be spelled out or the situation to be avoided, of members leaving their jobs to take their pension savings, could be invited.
What it does say is that a member “should” remain paid-up until the member consents for his/her share of the fund to be consolidated or transferred anywhere else. This, it explains, will enable members to make appropriate decisions and not take advantage of loopholes or convenient trends (such as cashing out) that could be to their detriment.
Significantly, however, it adds: “Members should also be able to access their default preserved funds anytime and (in) whatever amount.” Take that, you suckers who created havoc the last time. You’ve been accommodated.
Also unlike the first draft, both passive and active investment strategies can be equally considered by funds when choosing default portfolios. Ally this change to the allowance of performance fees and there’s a sensible reconciliation with provisions of Regulation 28 for investment by retirement funds in alternative-asset classes.
These are hedge funds and private equity. The former can reduce the volatility of investment returns; the latter, in addition to supporting entrepreneurship, broadens the tight universe of JSE-listed investment choices. Performance fees are intrinsic. If anything, sooner than later the ceilings prescribed by Reg 28 should be revised upwards.
In all, the second draft is an improvement and perhaps a relief after the first. Being widely welcomed, the salesmanship is much better too. But, predicated on having well-informed fund trustees and members, its success in advancing preservation will have to go hand-in-hand with advancing levels of financial literacy not yet evident.
NSSF LIVES ON
So the Department of Social Development hasn’t forgotten about the proposed National Social Security Fund that stirred such heated debate all those years ago when National Treasury simultaneously launched its first set of proposals for retirement-fund reform. Remember the devil of a time that the pundits had in trying to synchronise the one with the other?
Late last year, shortly before National Treasury produced its revised set of proposals, social development minister Bathabile Dlamini presented her department’s Comprehensive Social Security Document to Nedlac. On retirement funds, it’s pretty much unchanged from the 2012 effort. As movie mogul Sam Goldwyn might have observed: “It’s the same déjà vu all over again.”
The document envisages a low-cost pension fund alongside the NSSF and approved funds. Run on a defined-contribution basis and without government underwriting, it could also be a default destination for supplementary contributions made through automatic enrolment. Where an employer cannot enrol employees in an occupational fund, the employees would instead be enrolled in the default fund.
Minister Dlamini told Nedlac that a key principle relates to social solidarity: “Social risks must be shared by everyone, in a common pool, where everyone contributes according to their means while receiving benefits according to their needs. This is the essence of risk pooling that we aim to establish in respect of mandatory contributions for retirement, death and disability benefits for all workers.”
That bit about means and needs is a noble sentiment, sounding eerily familiar as conveniently adapted from the Marxist slogan: “From each according to his abilities, to each according to his needs.” The difference is less than subtle.
But at least the trade unions, which had put spanners into the works of National Treasury, now have a social-security plan on the table. They, and doubtless others, will start to pick apart the provisions for retirement reform. Déjà vu.
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