In August last year National Treasury gazetted some fundamental changes to how pension funds are going to work. Amendments to the Pensions Fund Act, which have generally become known as ‘the default regulations’, place a number of new requirements on fund trustees.
Two of the most important relate to how they deal with members leaving the fund. The first is that anyone who is moving to another employer must be able to preserve their current balance within the fund.
Secondly, at retirement, the fund must provide members with annuity options approved by the trustees. These needn’t be provided by the fund itself, but they must be suitable and competitively priced.
In both instances, the fund is also required to ensure that members have access to ‘retirement benefits counselling’ before they make any decisions. No money can be transferred or withdrawn unless this has been done.
This is an entirely new concept introduced in the amendments. ‘Retirement benefits counselling’ has never existed before, and the legislation also doesn’t specify exactly what it should entail.
What the act says is that it is the “disclosure and explanation, in clear and understandable language” of the risks and costs of the options the member has. How this might be done, however, remains open to interpretation.
What is clear is that this counselling is not, necessarily, advice. Whoever is providing the counselling does not have to assess the appropriateness of the options or make recommendations. They are only required to provide information about them.
The intention is quite obviously that if members have more information, they will make better choices and this will lead to better outcomes. However, how this counselling is provided will clearly have a big impact on how successful it is.
Since the act does not specifically state how the counselling should be delivered, funds could come up with a number of ways of doing it. It is possible that simply providing written information would satisfy the requirements. Other possibilities would be call centres, interaction with human resources, ‘robo-counselling’ or meetings with independent financial planners.
These come with different levels of costs, but also effectiveness. And if the intention is truly to influence outcomes, then just offering something in writing is unlikely to have much impact.
“We have experience proving that written communication does very little,” says David Gluckman, the head of special projects at Sanlam Employee Benefits. “If your aim is to comply, it ticks the box, but if you aim to really make a difference, written communication is ineffective.”
There are also potential legal issues with relying on written communication. What if the member doesn’t understand the language in which it is sent? Jargon and technical language can also impact on how well the message is received.
Gluckman points out that it is also worth noting that while the law doesn’t specifically say that counselling can’t be written, there is no other context in which the term is used in that sense. Marriage counselling, bereavement counselling or career counselling are never conducted purely on paper. They are meetings between a counsellor and whoever they are helping.
A retirement benefits counsellor?
It is possible that the amendments could therefore be creating an entirely new profession – that of a retirement benefits counsellor.
“It’s very much a new service,” says Viresh Maharaj, the CEO of Sanlam Employee Benefits Client Solutions. “Some players in the market are thinking of making this a business and going into this space.”
Given the poor savings rate in South Africa and the tiny percentage of people who can afford to retire comfortably, this has the potential to have a real impact. There is clearly a huge need, and in such circumstances there is also usually a significant opportunity.
Figures from the Sanlam Umbrella Fund show that 87.4% of members that retired in 2016 did so with amounts below R500 000. This is a demographic not usually attractive to financial adviseos, but where a huge impact can be made.
“There is a spectrum of what counselling could be, and we believe more funds should be on the side of the spectrum that is actively using this as an opportunity to improve outcomes for their members, because the status quo is proving to not be successful,” Maharaj says.
Given that this is something that every pension fund in the country has to offer to every single one of its members at some point, there is huge potential to provide innovative, cost-effective solutions. As a business opportunity, it is enormous.
What the regulator says
The Financial Sector Conduct Authority (FSCA – formerly the FSB) says that at this stage it does not plan to regulate this counselling or those who provide it, since it does not see it as advice. Only if it includes advice would a licence be required.
“The regulations do not prescribe who can provide retirement benefits counselling,” says Olano Makhubela, the deputy executive officer for retirement funds at the FSCA. “However, the fund is ultimately responsible and it can decide who and how to provide the counselling. What is key with the envisaged counselling, as per the regulations, is the provision of factual information on fund options.”