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‘Aggressive living annuity option is not in the public interest’

‘Aggressive living annuity option is not in the public interest’

The “default” annuity regulations were introduced to encourage the preservation of pension benefits and not to enable retirement funds to duplicate the investments offered by the financial services industry.

This was the finding of the Financial Services Tribunal when it dismissed an application brought by the KZN Municipal Pension Fund against the FSCA.

The fund sought an order compelling the FSCA to reconsider its application to be allowed to offer a sixth investment portfolio as part of its preferred living annuity strategy.

Regulation 39(3)(a) of the Pension Funds Act restricts retirement funds to offering four investment portfolios. However, the FSCA can exempt a fund from this restriction (section 281(1) of the Financial Sector Regulation Act and regulation 39(6) of the PFA).

The FSCA gave the KZN Municipal Pension Fund permission to add a fifth portfolio, the KZN Islamic Fund, but not a sixth, the KZN Aggressive Fund.

The pension fund’s trustees said they wanted to offer the KZN Aggressive Fund to ensure that members were treated fairly. If this portfolio were not available, some members would take their money out of the fund and pay much higher commissions and other fees for retail products, “which, in many cases, may be driven by unscrupulous investment advisers”.

The tribunal considered the fund’s application in terms of the requirements of section 281(1) of the FSRA: whether the exemption was contrary to the public interest, and whether it would prejudice the achievement of the objectives of the PFA and its regulations.

The tribunal said the fund misunderstood the reasons for the restricted investment choice.

It quoted the FSCA’s explanation that allowing the sixth portfolio would prejudice achieving the objectives of regulation 39(3)(a) – specifically, simplifying the investment options.

The FSCA said the regulation had not been introduced to duplicate the investment offerings available to pensioners, “but was included as part of provisions aimed at contributing to the preservation of pension benefits to reduce dependency on the state”.

The tribunal agreed with the FSCA that the “unscrupulous investment advisers” reason was “speculative”.

It also agreed that a pension fund was not a vehicle to develop and offer “all types of investment choices to accommodate each and every member”.

It may be in the interest of some members to offer the aggressive portfolio, but that does not mean it is in the public interest, which is broader, according to the tribunal.

“Pension funds are not supposed to create risk, and for the fund to add a risky option does not, on balance, serve the public interest.

“What the fund did not take into account is that aggressive portfolios are risky portfolios, and even ‘sophisticated’ members may not appreciate the risk. Less sophisticated members may be confused. Projections are inherently unreliable. The fund has no control on the performance of the portfolio. The fund is also not in a position to change wrong decisions by members,” it said.

The tribunal said the fund had not made a case that the FSCA had exercised its discretion improperly and dismissed the application.

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