The 2014 Budget announcement contained more detailed information on where we currently are on the road to extensive reforms of the retirement industry.
A media release by National Treasury on 14 March 2014 expanded on previous papers and discussion documents in this regard. The management summary lists the following broad policy goals, including intermediary remuneration:
- Implementing mandation or auto-enrolment. The voluntary nature of our retirement system is a significant factor underlying some micro structural inefficiencies in our retirement system. Mandating retirement provision, provided that the process is well managed and regulated, may resolve some of these issues, provided that adequate provision is made for low-income and vulnerable workers.
- Improving preservation. The lack of pre-retirement preservation significantly increases workers’ financial vulnerability when they retire, and increases costs in the retirement system.
- Improving fund disclosure. Without a comprehensive and simple measure of charges in retirement funds, the market for retirement fund provision cannot be expected to function adequately. There is currently no prescribed charge disclosure methodology for retirement funds, and it is imperative that disclosure of charges be improved in the South African retirement industry as a whole.
- Getting defaults right. International experience suggests that one of the most powerful tools for improving retirement fund outcomes is to ensure that what happens when individuals fail to exercise choice – the default option – triggers the ‘right’ response in a cost-effective way.
- Consolidating funds. Consolidating funds, and increasing the degree of standardisation in the structure, investment and benefit offerings of funds is therefore an important driver of increased efficiency to ensure that funds achieve economies of scale and that these are passed on to members.
- Simplifying retirement savings products and making them portable between providers. Too many providers may be competing on the basis of complex product designs rather than on value-for-money for members. A retirement industry based on simpler, more portable products will increase market competition between providers and increase the rewards for market innovations which reduce costs.
- Ensuring effective intermediation. An important factor influencing product design in the retirement savings market is the way in which intermediaries who sell insurance policies, such as most retirement annuity policies, are remunerated. Intermediaries should be paid in a way which does not create conflicts between their own interests and their duties to their customers.
The following table provides the proposed timeline for implementation:
|May 2014||Draft regulations on fund defaults for consultation||National Treasury|
|May 2014||Report on the Retail Distribution Review||Financial Services Board|
|Late 2014||Policy report on extending retirement system coverage with an emphasis on vulnerable workers||National Treasury|
|Late 2014||Draft regulatory instruments on trustee training, ‘fit and proper’ requirements, improved fund governance – particularly for multi-employer funds, unclaimed benefits funds and beneficiary funds – and consolidation and harmonisation of funds
Draft regulatory instruments to improve legacy products
|Financial Services Board|
|Early 2015||Draft regulations on charge disclosures for retirement funds||National Treasury|
|Early 2015||Draft amendments to Income Tax Act and Pension Funds Act to implement pre-retirement preservation proposals||National Treasury|
|Early 2015||Draft regulatory instruments to improve coverage of retirement system, with an emphasis on vulnerable workers||National Treasury|
|Late 2015||Draft regulatory instruments to improve product simplicity and portability
Draft regulatory instruments to rationalise public pensions
|National Treasury and Financial Services Board|
The publication of the Retail Distribution Review in May will be of significant importance to most of our readers, including those in the Short-term industry:
Draft proposals regarding intermediary remuneration on investment products, including retirement annuity policies, and on rebates on investment platforms, will be published in May 2014 when the Financial Services Board (FSB) releases the report of the Retail Distribution Review (RDR). The National Treasury broadly supports the replacement of sales commission on insurance policies with investment components by transparent fees negotiated between intermediaries and their customers, and the phasing-out of rebates in investment platforms, whether paid to the platform or to other intermediaries. This will simplify the layered charging structures on investment platforms, which should have a significant impact on the market for living annuities and new-generation retirement annuities.
Other proposals for intermediary remuneration in short-term insurance and risk-only long-term insurance products will also be released as part of the RDR. These reforms are likely to be phased in, with remuneration practices and profit-sharing arrangements that give rise to clear conflicts of interest being addressed in the near future, while broader changes to intermediary remuneration structures and levels will be introduced over the next 18 to 24 months to allow for system changes and a smooth transition.
Fasten your seatbelts. This is going to be a bumpy ride.
Click here to access the full discussion document.