A comment on National Treasury’s Draft Default Regulations

Executive summary by Kobus Hanekom, Simeka Consultants & Actuaries

The second draft of the proposed retirement funds default regulations was gazetted by National Treasury on 23 December 2016. Final public comments are invited by 28 February 2017.

The first draft of National Treasury’s “default regulations” was published on 22 July 2015 and a process of engagement with key stakeholders followed. These regulations follow on from the 2011 National Treasury paper, Charges in South African Retirement Funds.

The regulations aim to ensure that the retirement savings of South Africans are invested in a prudent and cost-effective way, that members enjoy value for their money and are able to retire more comfortably. It re-emphasises that fund boards have the responsibility to protect the interests and investments of pension fund members during and after the accumulation stage before retirement.

International research shows that good defaults can significantly improve retirement outcomes for members. Another aim of default strategies is to reduce complexity by requiring retirement funds to develop relatively simple and standardised products:

• during the accumulation phase by adopting a default investment strategy
• when members withdraw from funds before they retire by adopting a default preservation strategy
• when members convert their retirement savings into an income upon retirement by adopting an annuitisation strategy

Reform programme

National Treasury’s media statement reiterates that these default regulations form part of a reform programme to deliver better customer outcomes across the financial sector. The implementation of Twin Peaks will see market conduct requirements centralised in a Conduct of Financial Institutions (“CoFI”) Act. Under this framework, persons participating in the pension fund sector will be required to take more responsibility for the impact of their decisions on members. Government is also considering how savings can be mobilised to better support the National Development Plan, with particular attention on transforming the sector into one that is more inclusive and sustainable, to serve South Africans better.

Significant changes introduced

To their great credit, National Treasury implemented many of the industry comments and proposals from the previous set of draft regulations. The latest revised draft regulations are now much less restrictive, are more principle-based than rule-based and will therefore be easier to implement.
Following the public engagement programme, National Treasury attempted to:

• Make compliance easy, thereby helping to reduce compliance costs
• Enable flexibility by using more of a principles-based approach to regulation
• Encourage and facilitate better and appropriate decision-making by members

The previous draft regulations have been changed in the following significant respects:

Default investment portfolio

• The prohibition on investment portfolios and products that have elements of a guarantee or smoothing or performance fees will be abandoned
• Boards will be required to “equally consider” both passive and active investment strategies
• Clarification on the statement that counselling be limited to the provision of information and not advice: here the requirement to appoint a counsellor has been replaced with a requirement to provide counselling services
• Clarification that the default investment portfolio is only applicable to retirement funds with a defined contribution category

Default preservation

• The automatic ‘pot-follows member’ requirement on withdrawal has been abandoned. The members will have to decide if they want to transfer their paid-up benefits to their new employer’s fund
• No de minimis withdrawal amount will be provided for
• Clarification on the statement that only the investment fees for paid up-members must be the same: here the differentiation of administration fees is allowed for paid-up members

Annuity strategies

• Automatic defaults have been abandoned in favour of “an opt-in”, as certain annuity products could be irreversible. An “annuity strategy” with a proposed annuity is now preferred to a “default annuity strategy”
• Both in-fund and out-of-fund annuities are eligible as part of the annuity strategy, provided that prescribed principles are complied with
• National Treasury has significantly reduced and simplified the proposed new regulations