Still waters run deep, or at least they are expected to, unless of course there is a rock lying underneath the surface. Unlike the hype, anxiety, and enthusiasm with which most other regulatory provisions of comparable magnitude have received in the industry, there is a pending one that the industry seems to have been taking in quietly. Strangely so of course. It is on recalls. The regulator has released a guideline on recalls and re-registration of all post-retirement products in the industry.
Contrary to the rather lukewarm reception it has received in the market, we consider this guideline as probably one of the most impactful pieces of regulation to come out of the regulator’s offices in the last two years or so. It speaks directly to what we have been always calling for, the need for the system to start attending to the needs of its core stakeholders — the pensioners.
Industry within an industry
The industry is best advised not to treat this piece of pending legislation like any other regulatory provision. If implemented well, and the industry does not have the privilege to do it any differently anyway, this new regulatory provision has all the potential to address some of the post-retirement flaws of the Defined Contribution system we operate mostly under.
Just to be clear of course, it in no way attends to the pre-retirement shortcomings of the system, but will certainly do a good job to address its post-retirement weaknesses. We are of course so pleased to have learnt that right on the heels of this guideline, another guideline has just been released for comments on minimum requirements for setting up a retirement fund.
Noteworthy on this latest regulatory serving from the industry’s Commission is the requirement for all funds with 100 members or less to be housed under an umbrella fund. We feel two years of relentless advocacy have now paid off.
Next is on the breaking of the employer-centred paternalistic approach of the industry to allow members to make their own retirement fund choices, and where they are not happy, to be able to vote with their feet.
But this is certainly a conversation for another day. For now, it is time to embrace the latest proposed regulatory changes. They are certainly steps in the right direction.
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The new post-retirement regulatory provision has the potential to give birth to a whole new and vibrant “industry within an industry” — one that only focuses on providing financial solutions to pensioners. Through that, if properly rolled out, the industry can firmly give pensioners back real financial independence and a dignified lifestyle in retirement that is financially secure.
We think of the decumulation phase, as a critical sector awaiting to be committedly serviced with modern innovative products that speak to the needs and wants of those in retirement. Looked at from its potential, it is certainly a full industry on its own.
Roosevelt was right
The guideline, though captured in a few clauses, is weighty and unambiguously demands that the industry resets. It is clearly one of the long-awaited regulatory interventions to address some of the severe existential challenges faced by the industry.
Franklin Roosevelt’s emotionally charged, and very powerfully worded, statement of 1939 is a constant nag to most of us, reminding us all of our call of duty. He said then, there is “No greater tragedy that exists in modern civilisation than the aged, worn-out worker who, after a life of ceaseless effort and useful productivity, must look forward to his declining years to a poorhouse.
A modern consciousness demands a more human and efficient arrangement”. It would appear, Roosevelt’s point has finally hit home for the team at the regulator’s offices.
Pensioners do not demand much — all they want is a decent lifestyle in retirement with financial independence. They yearn for the industry to provide them with the basics of adequate, stable, and reliable benefits in retirement — monetary or in kind. No excuse can justify the current failure of the industry to do so. Absolutely none.
Unwavering commitment to the industry, and a deep sense of living to their calling, demands that the technocrats of this industry rise to the challenge and craft solutions that put these issues to rest, once and for all.
Someone has drawn an analogy with the medical industry and has asked the question — in the face of all the outbreaks, the pandemics, the complex chronic conditions, if the industry practitioners were medical practitioners, how many of their clients would have survived, and how many would they have buried. Time for deep introspection.
Stable incomes in real terms
In the guideline, the regulator instructs that the new generation of post-retirement products address the key requirements for relevancy, value preservation, and meeting customers’ core needs, as well as satisfying the treating customers fairly minimum requirements of the industry.
One would have thought that this was always given that it was the minimum standards at which the industry operated already. What this says is that the industry should not use the provisions of the guideline as a standard to aim for, but one to comfortably surpass.
To properly meet the requirements of the guideline, providers of post-retirement products need to pay attention to the preferences of our retirees.
There is enough evidence that shows that different retirement options are popular in different countries and societies to varying levels of magnitude. This could be due to different socio-economic factors and cultural norms.
It could also be purely because of the regulatory provisions that promote or allow some options ahead of others. We are lucky that, in our case, the regulatory provision is not overly prescriptive in terms of the types of post-retirement products that the industry now needs to avail.
What makes plying one’s trade in the post-retirement sector of the industry the more exciting is not just about its power to meaningfully change lives and livelihoods of our elderly and senior citizens.
It is also because it can be one of the most vexing and complex space of product development. Not only are the needs and wants of retirees in extreme conflict, they also evolve over time. Different individuals, based on their circumstances, will have diverse needs and wants too. There is not a one-size-fits-all solution.
However, at the core of every retiree’s wish list is basically an income reasonably sized enough to live on from year to year, and for the it to be relatively stable in real terms over time.
Value for money
Research conducted in the UK and elsewhere noted that the three top required features of retirement products are that they are guaranteed for life, offer inflation-protected incomes, and do not carry significant investment risk. What confused the researchers though is that while the traditional annuities seem to feature all the required attributes, evidence suggests that they are still not the most preferred products by retirees, triggering the question why?
This is partly explained by the perception of poor value for money endowed in traditional annuities – the exchange of the largest sum of money most people will have ever saved, in return for a small annual income.
This is regardless of whether theoretically and actuarially it is a fair exchange.
The full list of individuals’ requirements from their retirement annuities include, guarantees that they will receive the pensions for life, flexibility to change the product should they wish to, inflation protection, stable returns and increases, an income level that is predictable, adequate and affordable benefits, simple to understand benefits, as well as the ability to pass on some benefits to their children on their death.
To that list one can also add the need for transparency and disclosure, cost effectiveness, product evolution over time, and a low maintenance product for the retiree. The current generation of post-retirement products in the market seem to have failed quite seriously to adequately attend to all these needs, and this is where the regulator is coming from. Each of these needs and wants need to be sufficiently provided for in the features of any product that a provider proposes for it to qualify for the regulator’s approval.
The need for transparency for instance, not only does it require that retirees know how the discretionary increases will be calculated by a provider for a product with such features, but also the investment strategy that the provider intends to follow with the underlying assets.
That would take away the current “black box” notion of the decisions influencing the increases declared which retirees have, rightly so, been frowning at.
Evolving needs and wants
Some needs and wants are though more important than others depending on where a retiree is in their retirement journey. One individual might have a high desire for flexibility early in retirement, but a high desire for security later in retirement, and no bequest motivation.
Another individual might have low desire for security throughout their retirement because they have, for instance, enough guaranteed income from Nssa or something similar, and a high bequest motivation because they still have minor children. The products should be flexible enough to meet the different and evolving needs of retirees.
Essentially, post-retirement products come either as investment-type solutions, or as insurance-type solutions. There is quite a long list of different risk exposures that retirees hope to be questioned against when they buy post-retirement products.
Over and above those already referred to, there is also the default risk resulting from the product provider going under, and the liquidity risk, which is that even in the event where the product provider is adequately financially sound, that it still does not have enough liquidity to meet the regular pension payout requirements.
Individuals too encounter, at the point of choosing the appropriate retirement product, regret risk.
This is the fear of purchasing an annuity product that turns out not to be appropriate for their needs and wants. Then there is also the mis-selling risk from deceptive practices by some selling agents who may push for products that do not offer the best prices and returns for the retirees.
Consumption risk is also quite prevalent as a retiree transitions from a working life to one in retirement. It is such a significant change in lifestyle resulting in many not being sure enough of what goods and services they are likely to require the most in retirement.
That uncertainty does not help that much in deciding the most appropriate products for them. Retirement counselling, and not financial advice, is what most retirees would need at that point in time — something not widely promoted well enough in our industry, unfortunately so.
Tech-Enabled Products and Effective Communication
Critical to mention that recalling the current products and replacing them with newer products is of course on its own not a panacea that solves all of the industry’ problems. Our hyper-inflationary environment favours not any arrangements where one gives up their money with a promise that they will get it back some time in the future, either in full or in instalments. That, no doubt, remains the elephant in the room, but the industry should neither lose hope nor not change what is within its control and simply blame it all on the economic environment.
The other challenges the industry faces include a lack of sufficient savings at retirement. Members are arriving at retirement with very little saved in their retirement savings pots. No matter how great the post-retirement products can be made to be, if the accumulated assets to retire on are low to start off with, there is no product designing that can cure that. Members just need to be nudged to put aside enough for their life in retirement.
The industry has also suffered a prolonged period of an absent deep bond market. The few short-dated corporate bonds that have started trickling in are mostly just not good-enough-matches for the long-term nature of pension liabilities. In other markets there is a deep enough market of both government and corporate bonds of the right durations. With offshore allocations now allowed the industry needs to look beyond our borders for investment products that would provide more appropriate matches of pension-type of liabilities.
Effective communication remains a challenge where the consumers of the financial information are not that financially literate. The advocacy is of course not to try and make retirees financially smarter, but for the industry to come up with smart innovations capable of meeting retirees at their points of need and in an engagement, they understand. The current opaqueness of the design elements of most of the current products in the market has not been of much help in this regard. We though count so much on the industry addressing these communication issues using technology as both a differentiator and enabler.
Conclusion
The regulatory developments we are beginning to see look promising. They bring back a sense of direction in where we are heading towards and should be embraced by us all. No doubt we still have quite a journey ahead of us, but as the adage goes, the journey of a thousand miles begins with the first step – we seem to be now taking those initial steps.
- Mukadira is a consulting actuary at Rimca — Itaim@rimcasolutions.com; Gandidzanwa is an investment consultant at Rimca — Gandy@ rimcasolutions.com.
