• Sharebar
Pension Funds
Tuesday, July 1, 2008
Preserving the future

Old Mutual Corporate recently announced the findings of its 2008 Retirement Funds Survey. It aims to track trends in the market, and to review fund management and governance, investment and risk management, and member communication. It is crucial we try to understand the mood and thinking of the market ahead of an increasingly legislated retirement funding environment and the far-reaching government reform proposals towards a National Social Savings system. It is already agreed that smaller funds will not be cost effective when legislation takes hold so this should drive more towards amalgamating into umbrella funds. Such funds are already becoming popular amongst employers because it enables them to get rid of the responsibilities of both running a fund and of dealing with compliance issues.
Though there was a greater focus on communication on the part of funds, according to the survey, the average member still does not understand what’s going on. Indeed, as Seelan Gobalsamy, Executive General Manager of Old Mutual Corporate, comments, “I want to raise this as the biggest issue we now face in our industry.”
Despite considerable investment by retirement funds in improving levels of communication, members still feel appropriate financial education is lacking. Gobalsamy explains that the cost of providing communication to members has escalated considerably in the last few years as funds look to provide members with more information. “However, while the survey shows that 71% of those interviewed have a formal communication policies in place, members feel that it often lacks relevance and they still don’t understand the basics of retirement funds.”
The tendency for funds to focus on written communication is evident from the survey findings. For example, whilst 91% of funds provide some form of communication to new members joining the fund, less than half of funds (49%) use group presentations or workshops and only 32% offer one on one counselling. On the other hand, 98% of funds make use of information booklets, while 30% provide members with online information.
Gobalsamy says that particularly amongst blue collar workers, verbal delivery of information and education is regarded as more meaningful and effective. Many of these members interviewed say they are embarrassed about their lack of understanding and are instead interested in having group based communication sessions in which others can ask the questions.
The survey also reveals that many of these workers are suspicious about employers who they believe want to keep them in the dark on retirement fund issues. As a result, they generally prefer to receive communication from their unions, whom they trust to protect their interests.

Umbrella Funds
One of the key findings revealed in the 2008 Survey is the considerable growth in Umbrella Funds in recent years as they offer the ability to transfer the responsibilities of fund administration and trusteeship away from the employer, especially in an increasingly legislated industry, while also attempting to reduce costs.
The appeal of umbrella funds is that they also embed the expertise of providers, offer better value, lower cost and better benefits than comparable stand-alone funds.
According to Gobalsamy if the proposed National Social Security Scheme  becomes a reality, the growth in Umbrella Funds is likely to gain further momentum as employer-based fund memberships shrink, costs rise and private funds become unsustainable.
He says the growth in the popularity of Umbrella Funds amongst both small and large employers is also as a result of such funds having successfully addressed some of the previous criticisms levelled at them and having become more flexible for employers and members. “This is backed up by employers who have joined Umbrella Fund arrangements, saying they are very satisfied with the arrangements funds.”

Costs and governance
According to the survey, while there are signs that fund governance is improving, respondents agree that the process is incurring additional costs. Gobalsamy says that it is encouraging to see that the majority of funds are already adhering to the guidelines set out in PF130. He adds that while the principal shortfall remains a lack of formal trustee assessment tools with only 38% of funds interviewed currently using such tools, 80% of funds believe their trustees are already ‘very’ or ‘reasonably well equipped’ to perform their fiduciary duties.
Over the past ten years, the industry has seen an escalation in the cost of risk benefits due to the impact of HIV/AIDS. As a result, a number of funds have applied caps to contain the cost of risk benefits (22% according to the 2008 survey), above which they would have to apply a reduction in benefits or call o­n the employer to subsidize the cost of benefits.
Gobalsamy says it is therefore encouraging to see that the growth in the cost of claims has levelled off over the past two years, with 83% of funds included in the survey experiencing either an unchanged or decreased level of risk costs. “For members of funds, this means that there is a lesser likelihood that their regular net savings towards retirement will be reduced any further than it already has. For trustees, it means they must continue to review their risk policy statements, re-evaluating risk contribution caps that might have been revised upwards in the recent past.”

Retirement Reform
Of the survey respondents 26% are generally positive towards the reforms. However, the uncertainty around the details is one of the key reasons why 53% of those surveyed have mixed feelings towards the idea of a national social security arrangement.
Furthermore, 93% of respondents feel that members of employer funds should be able to opt out of the national fund and choose their own retirement fund service provider. This aspect of the proposal appears to be gaining favour, but may be subject to funds being able to meet set standards.
There is certainly broad consensus that members of private sector funds should be allowed the freedom of choice to opt out of the national fund if they so wish.

Gobalsamy points out that saving is crucial for our nation. All South Africans must improve their approach to saving and planning for their financial well being and not wait for the reforms. In this light compulsory preservation receives strong support from members and intermediaries, with many funds planning to do more towards this, even before legislation forces action.
“Preservation is an effective way of improving members’ ultimate retirement benefits,” he notes. “So, while it is encouraging that most boards of trustees believe members should be encouraged to preserve, it is of great concern that implementation is lacking. Education about important issues like preservation should be provided on an ongoing basis, not only when a member leaves a fund.”
The survey also reveals a similar trend in pre-retirement counselling. While 76% of all funds interviewed provide members with such counselling or financial advice, only 50% offer such advice one year before retirement, and only 2% offer regular annual input. However, 91% of funds interviewed consider the counselling to be effective.
David O’Brien who heads up the Old Mutual Retirement Fund Reform team, says that financial service providers have a mutual responsibility with government to assist South Africans to understand the implications of the reforms. He urges funds and consultants in the industry to continue to play a key role in keeping employers informed regarding developments as the reforms unfold.
Current statistics clearly reflect the need for changes to the current system. Household savings are now estimated at 0.01% of disposable income in South Africa, while approximately only six percent of South Africans can maintain their standard of living when they retire.
O’Brien says that a key reason for this situation is the ability of employees to access retirement benefits prior to retirement age. With statistics pointing towards the likelihood that up to 90% of people exiting their retirement funds in South Africa do not preserve their retirement funds, the issue of preservation is clearly an important one within the industry.
Of employer fund respondents 40% claim they are already taking steps to encourage preservation among exiting members and a further 22% indicate that they plan to do so - before government legislation enforces preservation.
Gobalsamy reiterates that a lack of financial education amongst members remains a key barrier to effective retirement planning.
For example, while 93% of all funds indicate a sense of responsibility to encourage exiting members to preserve their retirement fund benefits, only 50% actually provide advice and counselling to members who exit the fund for reasons other than retirement.
The financial reality of retirement is not clearly understood. This is despite an emphasis on member education, suggesting the approach is still not working. Most people get advice close to retirement. This is inappropriate. “We need more members to consider advice far earlier. It is impossible,” he points out, “to change the reality and arrange your retirement at just 12 months before ending your working life.
Funds report that around 40% of members believe they will have enough to retire on; while fund decision-makers believe that only 23% have enough to retire on.  Feedback from retirees support this finding, with 69% saying in reality their retirement falls far short of expectations. “This calls for a huge increase in better and effective communication,” comments Gobalsamy. As can be seen in the graph depicting pension fund contributions over the years, the picture worsens as we go through the age groups because “we do not have preservation. This picture should be a very worrying one for the industry.”

Member level investment choice
Another notable trend highlighted in the survey is the continued rise in popularity of retirement funds offering member level investment choice (MLIC), as Trustees seek to provide members with more control and choice over their retirement savings.
According to the findings in the survey, 36% of all funds interviewed offer member level investment choice compared to 28% in 2006. Of the funds surveyed, all the funds that offer MLIC are either Defined Contribution funds (43%) or hybrids and primarily medium to large in size.
The survey also shows that the number of choices offered to members varies greatly between funds, with some offering as few as three and others more than ten. Five of the larger Defined Contribution funds interviewed have actually increased the number of choices available to members in the last few years.
Of the employers participating in Umbrella Funds that were interviewed 11 offer MLIC, with nine of these offering up to five choices, while the others offer fewer choices.
According to Trevor Pascoe, head of investment services at Old Mutual Corporate, an interesting statistic of which trustees should be aware is that, despite being offered investment choice, it is estimated by respondents that approximately 80% of members use the default investment option.
“However, trustees of funds have a responsibility to ensure that such a default option adequately meets the needs of the largest possible percentage of those members. In most cases this means providing some form of protection. Trustees also have a fiduciary responsibility to be evaluating this default option regularly according to any changes in the demographics or average life stages of their member base.”

Gobalsamy comments that while funds have enjoyed good returns on their investments in recent years, the economic tide is turning and the downside risk of investment market volatility has increased, interest rates are rising, and the cost of providing benefits is on the rise.
“It is therefore not surprising that multi-manager and smoothed bonus products are already popular as they spread risk and aim for long term consistent returns. Absolute return and smoothed bonus products may gain further favour in difficult market conditions.”
Results from the survey show that six out of ten funds see room for smoothed bonus products in a life-stage portfolio, while 40% of funds interviewed are willing to pay a premium for capital guarantees.
It also reveals that interest in offshore investments will increase as a result of the further relaxation of exchange controls, but 40% of those interviewed are unsure whether they will place more assets offshore. By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:21.6 1st July, 2008
758 views, page last viewed on November 29, 2019