Managing Change in Retirement Funds

Presentation: 3rd Annual Retirement Reforms Southern Africa 2011

Speaker: Jonathan Mort

Company: Jonathan Mort Incorporated, Cape Town

Date: 27 October 2011

Change

“It is not the strongest of the species that survive, nor the most intelligent, but

the one most responsive to change”.

(Attributed to Charles Darwin)

“When we are no longer able to change a situation, we are challenged to

change ourselves”.

(Victor Frankl)

Change Cannot be Avoided

Change is constant, and comes -

•From different sources

•Is either embraced or imposed

The three dangers –

• Resisting change which is inevitable

• Having to cope with an avoidable change related risk

• Responding incorrectly (including an over-response) to change

The Best Solution

To be open to change

To maximise the opportunities which arise from change

To manage the risks associated with change

Change usually –

• Is painful

• Takes longer to manage than planned

• Has some measure of unintended consequences

What causes Change for Retirement Funds

Change in the law affecting retirement funds

Change in regulatory approach

Change in the employment environment (for occupational funds)

Change in the business environment affecting –

• Employers

• Service providers

Change in the economic and political environment

Example of Change in SA Retirement Fund Environment Over the last 10 Years

Surplus legislation -

•Minimum benefits

•Valuation methodology

New types of retirement funds –

•Unclaimed benefit funds

•Beneficiary funds

Changes in tax law

SA Retirement Funds Changes (cont)

Changes in investment laws –

•FAIS Act

•Security Services Act

•Collective Investment Schemes Act

•Nominee company requirements

•Regulation 28

Consolidation of retirement funds: reducing number of single occupational

funds and increase in multi-employer funds

Closure of DB funds

Where do we find Change? (cont)

Change in regulatory approach -

• Greater powers of intervention by Regulator

• Establishment of FSB Enforcement Committee

• Move to risk based supervision: compliance visits, forensic inspections

• Development of Twin Peaks model: separation of market conduct

function from policy development and solvency supervision

• Greater supervision, stricter licensing, of administrators and investment

managers

• Prospect of National Savings Plan

• Increase in informal sector (no planning for retirement savings in this

sector)

Change in Laws Affecting Retirement Funds

Trustees need to know

Assurance of awareness and implications by service providers

Changes to fund rules?

Changes to fund policy documents?

Changes to contracts?

What consequential changes are necessary?

Communication :

• With members?

• Employer?

Tax Consequences?

Change in Regulatory Approach

Ensure compliance with spirit of approach

Ensure co-operation

Engage with Regulator in respect of grey area / ambiguity / unintended

consequences

Change in Employment Environment

Will the employer’s business grow or decline?

Will the fund membership in consequence increase or decrease?

What changes will affect the fund’s membership profile?

Will there be an increase in turnover of members?

What changes to the employment arrangements will affect the fund (eg.

Flexibility of retirement date / full time employment / amount that can be

contributed to the fund)?

Will the fund be able to accept non-resident members?

Importance of open line of communication between fund and employer

Change in Economic Environment

2006 2007 2008 2009 2010 (e) 2011 (p) 2012 (p)

Angola 18,6 22,6 13,8 2,4 3,4 7,5 11,1

Botswana 5,1 4,8 3,1 -3,7 6,4 6,9 7,0

Kenya 6,3 7,1 1,7 2,6 5,0 5,3 5,5

Mozambique 8,7 7,3 6,8 6,4 8,1 7,7 7,9

Nigeria 6,0 6,4 6,0 7,0 8,1 6,9 6,7

South Africa 5,6 5,5 3,7 -1.7 2,8 3,6 4,3

Tanzania 6,7 7,1 7,4 6,0 6,8 6,9 7,3

Uganda 7,1 8,1 10,4 5,3 5,1 5,6 6,9

Zambia 6,2 6,2 5,7 6,4 6,6 6,5 6,7

Africa 6,2 6,5 5,5 3,1 4,9 3,7 5,8

Change in Economic Environment (cont)

Will there be a convergence of policy development in Africa?

Will there be a common market in Africa, similar to Eurozone?

Will this result in Pan African Pension Funds?

Where will the new sources of capital for economic growth come from?

• Tax payers

• Bank loans (local and international)

• Foreign state loans (eg. China)

• Institutional funds?

How will institutional funded growth be managed, and how will this affect the

investment arrangements within the fund?

Change in Fund Business

Change in the law / regulatory approach / economic and business environment usually

results in a change in the fund business at different levels

International emphasis on risk based supervision likely to result in greater emphasis on

proper governance.

Thus –

•will there be minimum fit and proper requirements for boards of trustees?

•will there be mandatory trustee training?

•will there be increased accountability?

•will there be higher trustees fees paid?

What impact will this have on having trustees elected from membership?

Focus on administration and investment risks – how will this develop, what will the

implications be for fund costs?

Change in Fund Business (cont)

Investment issues -

• Will pension funds be seen as alternate sources of capital for economic

growth

• Prescribed investments?

• Direct investing

• New regulatory requirements (ESG, new product issues)

• Investment Costs

Change in Fund Business (cont)

With increased costs, economies of scale become essential - growth of multi-

employer funds, with associated challenges

Benefit administration challenges -

• administrative platform issues

•skill challenges

• splintering / delegation of services

Risk Management in Change

Important to assess risks with every change

Use classic high/ medium /low assessment of –

• probability of identified risk

• impact of identified risk

Important to manage medium and high impact risks, whether low probability

or not

Have plan in place for the risk which materialises and which was not

foreseen or foreseeable

Engage with the Regulator about risks which are apparent from any

unavoidable change, whether as a result of any change in law, regulatory

approach or otherwise

Change is Good

Change is a part of life – there is an increasing rate of change in the world

Change is an opportunity to discard what is unnecessary, unhelpful or a

hindrance

But: unnecessary change is not helpful

Importantly - Values should not change, even though the environment does

Thank You.