David Gluckman Default Regulations and Living Annuities – issues to 8 August 2017 consider when retirement funds implement annuity strategies and the experience and learnings to date
it’s all about retirement outcomes … ‘ Despite the high membership rates for retirement funds and significant accumulated savings, only about 10% ’ of South Africans are able to maintain the same level of consumption they had before they stopped working. Strengthening Retirement Savings Media Release May 2012
the paradigm shift … ‘ These are structural changes and a paradigm shift. At the end of the day government has one interest and that is to ensure that the beneficiaries of the retirement ’ process benefit from their own savings. Strengthening Retirement Savings Finance Minister: Pravin Gordhan Media Release May 2012
RETIREMENT FUND Associations: unprompted TOP OF MIND ASSOCIATION TO ‘RETIREMENT FUNDS’ Size of word = number of mentions
This is what retirement is sold as by financial institutions. They build the expectation of a beach life, travelling and carefree attitude. However, participants have learnt that it could end up far from that. They have heard & witnessed examples where retired people have truly suffered.
2015 Draft Default Regulations “Currently workers benefit from a strong support structure provided by the retirement system while they are employed, which is effectively withdrawn for the vast majority of these workers after they retire. At retirement the workers are then left to the retail market , where they must bear the risks of retirement on their own, including the risks of poor financial advice, poor decisions, and high charges .“
2015 Draft Default Regulations “ In order to increase the competitiveness of the market for retirement income products, to provide a greater degree of assistance to members of retirement funds who retire, and to require funds to use their considerable purchasing power and skill to provide their members with cost-effective annuitisation options , Regulation 39 requires all funds to adopt a default annuity strategy, and lays out the requirements that fund boards implementing such a strategy must comply with . “
2016 Revised Draft Default Regulations Media Release - December 2016 “National Treasury re-emphasises, through these default regulations, that fund boards have the responsibility to protect the interests and investments of pension fund members during and post accumulation stages .”
2016 Principles for Annuity Strategies 1. Appropriate and suitable for members 2. Objectives clearly communicated to members 3. Reasonable and competitive fees and charges 4. Disclosure of impact of fees and charges 5. Members given access to retirement benefits counselling 6. Trustees must review annually 7. Maximum of 4 investment portfolios for living annuities 8. Drawdown levels are compliant with industry standards 9. Trustees must monitor sustainability & alert members
Has your Fund implemented an appropriate default annuity strategy for your members?
Imagine you are reaching retirement age right now. Which of the following options would you choose?
the member is the customer … • Treating Customers Fairly (TCF) • PF Circular 2 of 2016 - member communication and payment of benefits • default regulations
Institutional v retail … worlds are colliding
Evolution of Umbrella Funds Old Alexander SANLAM Mutual Liberty MMI Forbes 1986 1992 1995 1997 2002 2009 2015 Infant Teenager Adult 1986-2008 2009-2014 2015 -
the best of both worlds! … institutional partnering with retail
Sanlam Umbrella Fund EB platform LISP platform in fund in fund ex fund ex fund annuities preservation annuities preservation ordinary members affluent members economies of scale > 1000 collective investment schemes default strategies stockbroking services virtual tax haven virtual tax haven solidarity
South African apartheid referendum 17 March 1992 Do you support continuation of the reform process which the State President began on 2 February 1990 and which is aimed at a new Constitution through negotiation? Results Yes or no Votes Percentage Yes 1,924,186 68.73% No 875,619 31.27% Valid votes 2,799,805 99.82% Invalid or blank votes 5,142 0.18% Total votes 2,804,947 100.00% Voter turnout 85.08% Electorate 3,296,800
Sanlam Umbrella Fund trustee referendum 16 February 2015 Do you support continuation of the reform process which your leader began on 19 April 1988 and which is aimed at a better deal for members??
Economics 101 for financial advisers … Fund Credit # Retirements Retirement Amounts > 1m 312 R804m viable 500k-1m 157 R106m 150k - 500k 371 R103m 25k - 150k 380 R28m 0-25k 175 R2m Total 1,395 R1,042m > R500k 33.6% 87.4% based on Sanlam Umbrella Fund exits 2016
UWRF Default Annuity Experience ⧁ The University of the Witwatersrand Retirement Fund offered all retiring members a default annuity from the mid-to-late 1990s to its discontinuance in 2003. Here the default annuity was a Guaranteed Annuity in the name of the Fund attractively priced and on a commission free basis. ⧁ The actual experience was that no retiring member elected the default annuity option upon retirement , and all chose to invest their retirement proceeds elsewhere. It might be that the Fund’s default annuity option did serve a useful purpose as a reference point for retirees to benchmark other options against, but from a commercial / take-up perspective, it was a dismal failure.
ASISA LIFE INSURANCE STATISTICS For the period to 31 December 2016
ASISA LIFE INSURANCE STATISTICS For the period to 31 December 2016 # Policies Single Premiums Average Single Premium Living Annuities 55,086 R 56,810,000,000 R 1,031,297 Compulsory 13,950 R 5,286,000,000 R 378,925 Annuities
What type of annuity (pension) did you choose when you went on retirement?
ASISA Living Annuity Statistics 2015 Average drawdown Average drawdown Age band % - By # Policies % - By Asset Size < 55 9.4% 7.0% 55-59 8.5% 6.9% 60-64 8.5% 6.6% 65-69 8.4% 6.4% 70-74 8.9% 6.6% ≥75 9.5% 6.9% Overall 8.7% 6.6% Andrew Davison presentation to FPI
Features of a good default strategy Make access simple & unpressurised Same member experience pre- and post-retirement Contributions cease and pensions begin Seamless Align with pre-retirement investment strategy No time out of the market No up front costs Avoid discontinuities Not irreversible Can switch to ILLA or guaranteed annuity at any point Optionality is very valuable for retirees with >20 years life expectancy Accommodate financial advisers Inertia is the most powerful force in the universe!
Sanlam Umbrella Fund In Fund Living Annuitant investment options ⧁ Sanlam Lifestage ⧁ Volatility Protection Strategy ⧁ Passive Lifestage Strategy ⧁ Sanlam Blue Lifestage Strategy ⧁ SIM Balanced Fund ⧁ SIM Inflation Plus Fund ⧁ Sanlam Cash Fund ⧁ SMM 70 Portfolio ⧁ SMM 50 Portfolio ⧁ SMM 30 Portfolio ⧁ SMM Absolute Return CPI + 5% Portfolio ⧁ Sanlam NUR Balanced Portfolio ⧁ Allan Gray Global Balanced Portfolio ⧁ Coronation Houseview Portfolio ⧁ Investec Balanced Fund ⧁ Sanlam Foord Balanced Fund ⧁ Sanlam Prudential Balanced Fund ⧁ Sanlam Monthly Bonus Fund ⧁ Sanlam Stable Bonus Portfolio ⧁ SATRIX (SWIX) Balanced Tracker Fund
The Power of Scale Assumptions In-fund Out-of-fund Initial fund value R1 000 000 R1 000 000 Initial drawdown 7% 7% Drawdown increase rate 50% of CPI pa 50% of CPI pa Initial fee Nil Nil Ongoing administration fee R150 pm increasing with CPI Nil Ongoing advice fee 0.5% of assets 0.75% of assets Investment management fee 1% of assets 1.50% of assets Gross investment return CPI + 3.5% CPI + 3.5%
The Power of Scale
‘ The challenge going forward will be to get somewhere in between, i.e. you cannot deliver a retail service and product at wholesale costs and vice versa ….the pricing gap is big, but some of it is for a reason ’ … Institutional businesses are not geared for retail Dawie de Villiers Chief Executive Employee Benefits
Key Differences (besides costs) In Fund Living Annuities Ex Fund Living Annuities (via insurers) Governed by Pension Funds Act Governed by Long Term Insurance Act Governance overseen by Board of Trustees Individual insurance contract 37C of Pension Funds Act applies on death Beneficiary nomination prevails on death Regulation 28 of Pension Funds Act applies No Regulation 28 constraints
Smoothed bonus products can mitigate investment risks! Real pension & 5% drawdown Conservative; Max 25% SB; Aggressive; Conservative; Max 25% SB; Aggressive; 50% 50% 50% 5% 5% 5% Percentile 50% 50% 50% 5% 5% 5% Sustainable Years 23.0 31.1 31.4 14.6 14.8 12.8 60,000 50,000 40,000 30,000 20,000 10,000 - 0 5 10 15 20 25 30 35 Conservative; 50% Max 25% SB; 50% Aggressive; 50% Conservative; 5% Max 25% SB; 5% Aggressive; 5% 32
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