FINANCE: Change the Company’s Behaviour Before the Fund Manager
Recent Kwazulu-Natal Business News
Changing a retirement fund manager, and in many cases an investment approach, almost always incurs a cost to the fund – without any guarantee that this cost will be made up by the new strategy’s improved performance.
Instead, John Anderson, Alexander Forbes Financial Services (Pty) Limited argues that “changing governance, the behaviour of Human Resources departments or the conduct of fund members themselves costs very little and is something trustees, management committees of umbrella funds or employers can and should change.”
The point of contributing to a retirement fund is to help an individual accumulate enough money to be able to sustain themselves in retirement. The Net Replacement Ratio (NRR) is a measure that has been developed to help individuals gauge their ability to save an adequate sum of money for retirement.
Helping individuals achieve a reasonable NRR is best achieved by adopting what Anderson calls an outcomes-based approach to governance in South African organisations.
By using the NRR measure in conjunction with an outcomes-based approach to the management of funds Alexander Forbes is shifting retirement fund management thinking about defined contribution arrangements from one of routine administration, compliance and returns – “to the real purpose of retirement, namely, ensuring that members maintain their lifestyles after retirement” says Anderson.
The outcomes-based approach, however, requires the following kind of human resource and governance changes if the ability of retirement funds to maintain members’ lifestyles in to retirement is to be improved:
· Ensuring appropriate allocation of resources to structures that help members achieve a reasonable retirement outcome.
· Employers, trustees and management committees of umbrella funds ensuring that members, who in South Africa are generally not financially literate, able or willing to make appropriate decisions, are provided with the right support.
· Issues that have the greatest impact on retired lifestyle outcomes should attract the greatest trustee, employer and management committee attention.
· Making sure that trustee, employer and management committee meetings and decision-making processes dedicate time to discuss all the factors (not just investment returns) contributing towards the NRR outcomes.
· Ensuring that outcomes and the factors impacting on them are measured appropriately. Such measurements assist in determining whether members are on track and whether any interventions put in place by employers, trustees and management committees are in fact improving outcomes.
· Ensuring that governance becomes about equipping scheme members to make the right decisions.
An outcomes-based approach also requires that individual South African retirement fund members make the following kind of behavioural changes to improve their ability to achieve a comfortable retirement:
· Contributing sufficient amounts and investing appropriately to ensure a good outcome.
· Preserving withdrawal benefits upon resignation.
· Taking a smaller portion of their retirement benefit in cash, ensuring that drawdown rates on living annuities are at a level that will sustain pensions for life.
· Ensuring that better allowances are made for inflation when purchasing an annuity at retirement.
· Ensuring that sufficient allowance is made for a spouses pension at retirement.
In short, a different approach is required for defined contribution funds in South Africa if the retirement industry is to improve the outcomes achieved by members.
This approach “requires both organisational, structural and behavioural changes that focus on investing to maintain the lifestyle that members will live after retirement – as opposed to narrowly focusing on returns along with operational and compliance matters” concludes Anderson.
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