Transforming the relationship between retirement fund trustees and their members

Transformation remains the essential buzzword in every sphere of South African business, particularly asset management, according to David Gluckman at the recent Batseta winter conference. It is time for trustees  to start holding those essential  conversations with their fund members  on issues  affecting retirement outcomes.

The debate, chaired by the head of the Alexander Forbes Research Institute, Anne Cabot- Alletzhauser, took place at the winter conference of Batseta, the Council of Retirement Funds for South Africa, at Emperors Palace in Ekurhuleni.  It was agreed that the process of addressing the demands of retirement fund contributors needed radical change.

According to Cabot-Alletzhauser, retirement is the biggest savings vehicle for any individual. The major challenge now is how to transform the conversation away from immediate returns on investment to improving the long-term replacement-income levels of members.

New priority for trustees
David Gluckman, head of special projects at Sanlam Employee Benefits, said the new priority for fund trustees should be to improve retirement fund outcomes for fund members, and to concentrate their efforts on where they could make a meaningful difference to these outcomes.

He emphasized that most members could not afford sophisticated financial advice, so it was up to institutions to provide guidance to them. This would require a fundamental change in thinking about the way trustees deal with fund members’ individual requirements.

“Employers and trustees  need to do a lot more to educate members  on the implications of their choices”.

Trustees will now have to emphasise other components, rather than just their choice of asset manager. Most balanced funds deliver similar risk-adjusted returns over the long term, so the asset managers should be allowed to do their jobs. The focus for trustees should rather be on issues such as members’ contribution levels, the level of their savings and the preservation of those savings.

Trustees must explain replacement ratios to their members
Gluckman said another primary responsibility of trustees was to explain the concept of replacement ratios to members, and to work towards improving these measures. A replacement ratio refers to the percentage amount of an individual’s salary that a retiree can reasonably hope to expect to receive from their pension at retirement.

Trustees must begin the conversation with members at least 10 years before retirement age to prepare them for their ‘career change’, according to Gluckman. It is essential that members understand their personal replacement ratio, and be told how their other savings or debt may have an impact on their post-retirement standard of living.

“Investment returns  and volatility should be the concern  of asset managers,  not trustees.  Give the asset managers  a mandate and let them deliver”.

(Panel member, Andrew Davison, head of investment consulting at Old Mutual Corporate)

The overall theme that emerged was that employers and trustees needed to do a lot more to educate members on the implications of their choices. For example, how their replacement ratios would be reduced should they choose to make zero personal contribution to their retirement savings, and leaving all the responsibility all to their employers. Members had to be told how their decisions regarding short-term income requirements could affect their standard of living in the future.

Gluckman congratulated National Treasury on helping frame a new and meaningful discussion within the retirement fund industry. He said that the obligation is increasingly on fund trustees to help achieve better outcomes for fund members rather than simply being concerned with tick-box governance.