Pension fund default regulation changes – what will it mean to you?
By the first of March 2019, the revised default regulations in terms of Section 37, 38 and 39 of the Pension Funds Act will be fully enforceable. Most pension and provident fund administrators and providers have been working tirelessly to ensure that they are fully compliant with the new and improved regulations.
But what are these default regulations and why have they been changed? What do they mean and how will they impact you as a member of a pension or provident fund? If any of these questions sound familiar, this article is for you.
At Cornerstone Employee Benefits, we believe in empowering our clients by ensuring that they are kept up to date with any changes and new innovations in the employee benefits space. It is with this ethos in mind that we have put together a summarised look at how the new default regulations impact and benefit members. It’s important to note that this summary can by no means replace the explanatory memorandum released by the national treasury – please click here for the full document.
Why have the regulations changed?
After many concerns within the public and private sector regarding the selection of investment portfolios, the low replacement value of retirement savings and low incidents of fund preservation, the national treasury stepped in to make a difference.
An excerpt from the explanatory memorandum gives more clarity on what the new regulations aims to achieve:
“Default Investment Portfolios (Regulation 37) broadly and mainly seek to standardise and simplify, where appropriate, the default investment portfolios members are enrolled into during the accumulation phase, with the aim of promoting transparency and reducing costs. Secondly, default Preservation and Portability (Regulation 38) seek to encourage preservation when members change jobs, which is critical in assisting members to retire with decent retirement savings. Lastly, Annuity Strategy (Regulation 38) aims to protect members at retirement or in the de-accumulation phase, by providing them with cost-effective and suitable annuities..”
What do these changes mean for me and how will I benefit?
- Better understanding of retirement savings and improved personal financial management
Once implemented, the new regulations would require that all members receive a comprehensive explanation of the investment choices, the associated costs as well as options at retirement – all in an easy to understand way that isn’t overly complex and technical. Giving them a better understanding of their retirement savings will empower members to take more control over their own personal financial wellness.
- More cost-effective retirement savings
The new default regulations will also aid in saving you money. To ensure a more transparent and cost-effective approach to retirement savings, the new regulations will also require the board of trustees to offer members a package of default options that are easy to understand and suitable for all budgets. These will include a default investment portfolio, a default in-fund preservation option as well as a default annuity strategy.
- Improved retirement
In most cases, your retirement planning would aim to give you a monthly income equal to about 75% of your salary. This “post retirement salary” is known as a replacement value. According to a recent article in IOL Personal Finance, the average South African replacement value at retirement is at a staggering 28.8% with average projections as low as 40.5%. The biggest reason for these low replacement values are a massive lack of preservation i.e. instead of preserving their pension funds, members opt for cash pay-outs when changing employers, thereby wiping out their savings.
By offering retirement benefit counselling and education, the new default regulations endeavour to ensure better preservation of funds, thereby ensuring a better replacement value and an improved income for members at retirement. This gives retirees more independence and a better quality of life.
If you have any questions regarding the new default regulations or any other aspect of your current pension fund, whether it’s a personal fund or part of an employer group scheme, get in touch with Cornerstone Employee Benefits today and we will gladly assist where we can.