Annuitisation reform

Retirement reform for “the lower half”: Who’s going to pay for the advice?

Published in Today’s Trustee, 8 April 2016

By David Hurford, Director, Marketing & Consulting, Fairheads Benefit Services

The dust on T-Day seems to have settled and through last minute compromises, a watered-down reform has been implemented. But are we closer to the outcomes so desperately sought by National Treasury and the industry at large? Will retirement outcomes for everyday South Africans be better under this deal?

The industry’s preparation for compulsory annuitisation indeed saw a flurry of new and innovative products being considered for development. For the first time perhaps, products aimed at the lower end of the wealth spectrum were being designed as default products and many of them appear to offer real value to retirees. Industry appears to have responded well to the call for lower costs and more appropriate products in keeping with the principles of Treating Customers Fairly. My hope is that this product development continues, even though the compulsory annuitisation component has been delayed.

Some of the key challenges in real reform appear to have been glossed over however and it is critical that the industry comes to grips with the needs of retirees in a demand driven,market-oriented way rather than through forced legislation.

The first of these challenges is the level of trust in financial institutions amongst the population, most notably those who have generally been excluded from any serious financial services products post retirement because they traditionally cashed out their provident fund.

Another major challenge is the low level of financial literacy amongst many who have little or no idea about how financial markets work. These people are easy prey for unscrupulous, commission-driven sales people who have a history of putting them in an unsuitable product.

Retirement benefit counsellors needed

In my view these issues will render robo-advice and other non-human interventions highly ineffective in ensuring better retirement outcomes. In Fairheads Benefit Services’ experience, servicing members at the lower-income end of the market requires high levels of guidance and human intervention. However, this guidance comes at a significant cost, especially given the high levels of compliance required of those providing the service. Government urgently needs to set down the framework for the Retirement Benefit Counsellor role mooted in the draft default regulations, and provide for a reduced level of qualifications appropriate for the limited advice that they will offer.

This leads to another key concern around servicing the exiting retirement fund member, being that many retirement funds communicate to their member through the HR department of their employer. This has proven to be a convenient and cost effective distribution channel. However, it is highly unlikely that HR Officers around the country will be particularly enthusiastic about dealing with fund members who are no longer part of their work-force. Suddenly, retirement funds will need to develop distribution channels to talk directly to their members – simple to do if they are internet savvy, a little harder when they live on a hilltop in rural Eastern Cape.

Critical to ensuring that good outcomes are achieved for those at the lower end of the wealth spectrum will be a concerted effort by the industry, supported by a practical legislative framework which can provide for cost-effective, limited advice as well as high levels of ongoing service delivery in an appropriate channel.

Published in Today’s Trustee, April/June 2016 issue