The fallout from COVID-19 is disrupting most sectors and the retirement fund industry is no exception. While the default regulations were implemented to improve South Africans’ dismal retirement outcomes, Poobalan Govender, Manager for Income Solutions at Momentum Corporate, says trustees need to re-evaluate default strategies in a COVID-19 battered landscape.

The default regulations impact on three important areas of saving for retirement, in particular:

· Where members’ contributions are invested while their retirement savings are growing,

· Options available to members to convert their savings into an annuity at retirement, and

· The ease of leaving retirement savings invested when changing jobs.

Govender says, “Three burning issues every board of trustees should be discussing at this point are how well their fund’s default investment portfolio is holding up, their annuity strategy given current market conditions, and how to facilitate benefit preservation where members face retrenchment.”

COVID-19 related volatility is shining the spotlight on how well retirement funds’ default portfolios are protecting members from volatility, particularly those members who are close to retirement.

Portfolios with life stage progression offer a degree of protection. This involves having younger members invested in aggressive portfolios that target high, inflation-beating returns over the long-term. But as members get closer to retirement, their savings are automatically switched to portfolios that reduce their exposure to market volatility.

Govender says that smoothed bonus funds should be a serious consideration for trustees seeking to protect members from market volatility, particularly when it comes to giving soon-to-be retirees a smoother investment ride to retirement.

Although these funds invest in a diverse range of assets, investors receive their return in the form of a bonus based on the smoothed returns achieved on the portfolio’s underlying investments. The process of smoothing means that when returns are high, a portion of the investment growth is held back for use in years when returns are low.

Another key topic of discussion for trustees should be their retirement fund’s annuity strategy, also a default regulations requirement. Govender says retirement funds would do well to consider a with-profit annuity as the preferred annuity in their annuity strategy, given current conditions.

Annuity prices change and are based on various criteria, including market performance and the change in nominal interest rates. Trustees should be asking how the current market conditions have impacted on the purchasing price of their preferred annuity within their annuity strategy.

Govender says that there is a high probability that many retirement fund members invested in typical market-linked balanced funds experienced a decrease of around 15% in the investment value of their retirement savings between December 2019 and March 2020. While soon-to-be retirees are naturally very concerned, this plunge has not decreased the value they will receive for their savings if they buy a dynamically priced with-profit annuity. This is because the annuity became cheaper with the increase in fixed interest yields over the longer-term and the lower investment markets in March 2020.

Even though fixed interest yields have subsequently reduced, the current price and level of guaranteed income should make with-profit annuities an attractive proposition for retirement funds setting their annuity strategy in the current market conditions, according to Govender.

Another key area impacting on retirement outcomes is members’ propensity to preserve their retirement benefits when leaving their jobs. With retrenchments set to rise sharply in the current economic climate, Govender says trustees need to think about how to proactively encourage full or partial preservation, wherever possible.

“This can be achieved by giving resigning employees access to smart technology-driven services which tangibly demonstrate the implications of withdrawing savings rather than staying invested,” says Govender. “Making it easy for members to preserve in-fund and leave their retirement savings in the same portfolio also allows members to regain losses from the poor market performance.”

Another important aspect of the default regulations, member benefit counselling, is more important than ever. “The Momentum Corporate benefit counsellors are working around the clock to allay the fears of concerned members, helping them to understand their fund’s default strategies and providing reliable information for smart financial choices,” says Govender.

Govender concludes, “When we are driving and the road suddenly becomes bumpier or steeper, we change gears. With the fallout from COVID-19 changing the retirement landscape, it’s time for trustees to rethink default strategies in the tougher terrain.”

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