OLD MUTUAL CORPORATE: Expert Opinions: Edition April / June 2019


Default regulations’ learning curve

Andrew Davison, Head of Advice at Old Mutual Corporate
Consultants, summarises what trustees need to know.

On 1 March 2019, the industry saw full implementation of the retirement-fund default regulations. They aim to deliver better retirement outcomes for members by addressing three key areas of retirement savings.

A fund default investment strategy is nothing new. It is unusual for a fund to not have one. Given that many people are invested in their fund’s default strategy, the regulations seek to tighten up the requirements that such a default investment strategy should meet.

One of the biggest reasons why people fail to accumulate sufficient savings by the time they reach retirement is that they cash in their savings when changing jobs. The regulations aim to improve preservation of savings by providing cost-effective and easy-to-access methods of preservation. Then, at retirement, the regulations require funds to offer members an annuity or annuities to assist them to convert their accumulated savings into a pension for life.

There are three default regulations to the Pension Funds Act:

  • Reg 37 requires retirement funds to offer a sound default investment strategy;
  • Reg 38 requires that pension and provident funds offer a default preservation strategy;
  • Reg 39 requires funds to have an annuity strategy for members upon their retirement.

All three offerings should be appropriate, simple, cost-effective and transparent to improve members’ overall benefits. Members should be provided with suitable communication in relation to the default investment strategy, including fees and performance, on an ongoing basis. They should also be given adequate information and guidance about their options when they leave a fund, either before retirement or at retirement.

The industry has been aware of these changes since they were promulgated on 25 August 2017. They align with the principle of Treating Customers Fairly which governs the way all financial-services providers treat clients.

What are trustees to do?

Even if trustees have already developed and implemented their fund’s default solutions, there is still a lot of work to be done. It is essential that they carefully document the process followed and the decisions taken as compliance by boards will need to be evidenced.

The fund’s Investment Policy Statement (IPS) must be updated to reflect any changes and specifically to reference Reg 37. The IPS should also refer to the annuity strategy that the fund has put in place and ensure alignment between pre- and post-retirement investment strategies. Trustees should consider drafting an Annuity Policy Statement to document the fund’s annuity strategy.

There is also the important issue of communicating the default solutions to members and ensuring that they understand the options and solutions available to them, including any access to retirement benefit counselling. A further note offering interpretation and other guidance in respect of the default regulations was issued by the Financial Sector Conduct Authority (FSCA) on 12 December 2018.

There are two further draft conduct standards that are still to be released. They cover living annuities and smoothed-bonus portfolios.

Funds that utilise smoothed-bonus portfolios for their default investment strategy and those funds that have selected a living annuity as part of their annuity strategy will need to review their solutions to ensure that they comply once the final documents are released. The FSCA has indicated that these will be issued shortly, but with a delayed implementation date.

Challenges for trustees

There will be additional work for trustees. This relates to development of the solutions, selection of service providers, communication to members and then ongoing, regular review of solutions and providers to ensure they remain appropriate. Depending on the type of annuity strategy developed, the levels of administration and oversight will vary.

The default regulations are not a silver bullet. There will still be challenges. An important element is that trustees deal with a group arrangement. It is therefore impossible to build solutions that suit each and every individual member, but trustees need to communicate with members and advise them on how decisions were made in the members’ interests and to suit their personal circumstances.

Choosing annuity strategies

Regs 37(2) and 39(2) place an onerous responsibility on trustees when it comes to default investment portfolios and annuity strategies. Education and upskilling of trustees are paramount if they are to implement high-quality solutions that truly address their members’ needs.

There are various training providers that are adapting their training to incorporate post-retirement solutions and default regulations. Employee-benefit consultants are also investing in training and building the knowledge of their consultants to advise trustee boards.

Asset consultants are also available to assist trustee boards to navigate this new territory. It is fair to say that this is a learning curve for the entire retirement industry. In the past it has not had to deal with post-retirement issues, especially in the defined-contribution space.

Trustees’ key requirement is to justify that they are adhering to the regulations. They should be able to document and demonstrate that they have applied their minds and considered all the available options before selecting the solutions or service providers they have used. Clear objective comparisons will also have to be documented as part of the process.

There are many different types of annuities available in the market. It has proven a challenging exercise for most trustee boards to go about choosing annuities that meet the requirements of Reg 39.

Davison . . . improvements over time

This is exacerbated by the fact that it’s a new area of expertise for most trustees. Annuities, particularly with-profit annuities, are not easy to compare because the levels of initial pension for a set amount of capital vary between providers.

Also, over time the bonus histories aren’t always comparable and they need to be evaluated in conjunction with the starting pension. This means that it is difficult to assess the likely future performance.

This has undoubtedly been, and will still be, a steep learning curve for trustees and consultants.

Our view is that the institutional default annuity space will evolve over the next few years, both in terms of the products available as well as in terms of the ability to assess and compare the various annuities and providers.

For more information, please contact Andrew on adavison@oldmutual.com, or visit