We have previously communicated on the default regulations that are set to be implemented with effect from 1 March 2019. In general, default options are automatic choices made on behalf of members who do not exercise an alternative choice.
The new default regulations are aimed at promoting good fund governance and improving the retirement outcomes of retirement fund members and prescribe the requirements for default investment portfolios, default preservation and annuity strategies.
The fund already complies with these new regulations by providing the following default options best suited to the membership profile:
Default investment portfolios
Requirements: The default investment strategy regulation requires all retirement funds to have a simple, cost-effective and transparent default investment strategy in place into which members who have never made an investment choice or who have chosen to again revert to the default strategy, should be invested.
The asset composition, performance of the default investment portfolio(s) compared to appropriate benchmarks, top holdings values and fund returns for current and at least two previous financial years, should be communicated to members at least once a year.
The NFMW-default investment portfolios: The fund applies a default life stage model which automatically takes members through different investment portfolios i.e. aggressive to more conservative portfolios as they approach retirement age. The life stage investment portfolios are as follows:
- Members younger than age 55 - Aggressive Growth portfolio
- Members aged 55 and older, but younger than age 62 -Capital Growth portfolio
- Members aged 62 and older - Stable Growth portfolio
The investment portfolio fact sheets, which include the required information as stipulated above, are published on the fund’s website on a monthly basis and distributed as part of the electronic mailer, with a complete investment report included in the annual report.
The fund provides members with the flexibility to elect any of the individual investment portfolio options available.
Default preservation option
Requirements: Retirement funds are required to make provision for ‘paid-up members’ – that is, when members are no longer employed by the employer and therefore no longer actively contributing to the fund, they must automatically be made ‘paid-up members’ when they leave the employment of the employer, and be presented with a paid-up membership certificate, recording their interests in the fund. Members may, however, also elect to have their resignation benefits paid out to them.
The administration fees for paid-up members should, in normal circumstances, be less than the administration fees for in-service members due the absence of monthly contributions and the administration involved.
A member may elect to transfer a paid-up benefit from another fund at any stage and no charges may be levied in respect of such transfer.
NFMW-default preservation: The default preservation (deferred) option allows members who resign, are retrenched or dismissed from employment to retain their fund credit in the fund, with it continuing to grow with the fund returns. The administration fee is a fixed cost of R31.42 per month vs. the 0.5% of pensionable salary paid by active members.
The default preservation option (deferred option) will apply when a member exits the fund, unless the member indicates a choice of an alternative payment option in writing i.e. lump sum cash payment and/or a transfer to an approved fund.
Default annuity strategies
Requirements: Retirement funds, including retirement annuity funds, are required to have a default annuity strategy in place. Various products can form part of the default annuity strategy. For example, in-fund guaranteed pensions, in-fund living annuities, in-fund with-profits pensions and certain out of fund life annuities guaranteed by an insurance company, are all permitted.
Trustees may also decide to have different annuity products as part of the annuity strategy. Members can, however, opt out and move into other annuity products of their choice if they so wish. Funds must also make retirement benefit counsellors available to members close to retirement to assist them in understanding the default annuity strategy.
Similar to the provisions of the default investment strategy, the default annuity strategy also needs to offer good value for money, be well communicated to members, have all fees and charges disclosed and be reviewed regularly to ensure compliance with the regulation.
NFMW post-retirement products: The NFMW offers three post-retirement products, the on-balance sheet NFMW living annuity (managed as part of the fund’s assets), the off-balance sheet NFMW Golden income living annuity and the NFMW Golden income life annuity underwritten by MMI.
The major advantage for members is a cost benefit, as the management and investment fees on the fund's default options are significantly lower when compared to the products available from external providers (life insurance companies and investment platforms). There will be a low charge for benefit administration services and the investment management fees will be similar to the existing pre-retirement portfolios.
Members can choose a guaranteed income stream after their working life, in the form of a pension payable for life i.e. a guaranteed or life annuity. Alternatively, their income level post retirement can be self-determined by way of a living annuity.
The default living annuity offered by the NFMW is managed by the Board of Trustees. Certain guidelines and rules will apply to the fund's default living annuity option, which need to be carefully considered before choosing this default option:
- There is no pension guarantee i.e. your pension/income is based on the drawdown rates expressed as a percentage of assets.
- The minimum investment amount is R1.5 million. This provides for some longevity risk mitigation.
- The assets of the default living annuity may be invested in any of the following NFMW-individual investment portfolios: Capital Protector, Stable Growth, Capital Growth and Aggressive Growth. This may depend on your financial position and required drawdown rate.
The following maximum drawdown/income rates apply to the NFMW living annuity:
|Age||Maximum drawdown rate|
|If aged < 70 on invested amounts below R5m||6% per annum|
|If aged < 70 on invested amounts above R5m||8% per annum|
|Older than 70 and younger than 75||10% per annum|
|Older than 75 and younger than 80||12% per annum|
|Older than 80 and younger than 85||15% per annum|
|Older than 85||17.5% per annum|
The minimum income drawdown rate is 2.5% per annum.
- The balance retirement capital in your living annuity account will remain part of the fund's assets. As a result, all benefits are subject to the conditions of the Pension Funds Act.
- A flat administration fee of R73.44 per annuitant per month will be levied and actual investment management fees will apply as per the NFMW-investment portfolios. On average, the total fee will be approximately one-third of industry norms. This beneficial fee structure will result in a fee saving of between 1% and 2% per year compared to externally-provided living annuities.
- No commissions are payable (advice fee where agreed, may be applicable).
- You will pay income tax at your personal income tax rate on the amount of income received.
NFMW GOLDEN INCOME WITH-PROFITS LIFE ANNUITY
The default life annuity offered by the NFMW is underwritten by MMI. The following standard features apply:
- It provides a guaranteed monthly pension for life.
- It will target pension increases equal to 75% of inflation every year i.e. your pension will increase annually by a targeted 75% of inflation but is dependent on the actual investment return.
- The guarantee period is 10 years/120 months i.e. if you pass away within 10 years after retirement, the full pension will still be paid (to a beneficiary) for the remainder of the 10-year period. If you pass away more than 10 years after your retirement date, pension payments will cease unless your spouse is still alive, subject to a joint life annuity purchase.
- If you are married, the life annuity will be a compulsory joint life annuity that will pay the spouse 75% of the pension should you pass away.
- If you are unmarried and you pass away during the guarantee period (within 10 years of retirement) the balance of the pension will be paid to your beneficiaries/nominees.
- The amount of pension will only be determined once you have reached your retirement age. The pricing should be favourable compared to what external life annuity product providers will offer.
- If you and your spouse pass away after the 10-year guarantee period, no further payments will be due or payable to your beneficiaries.
- Provision is made for a 13th cheque which is payable in November every year i.e. in effect two months' worth of pension is paid in November every year.
- You will pay income tax at your personal income tax rate on the amount of pension received.
OUT-OF-FUND MMI NFMW GOLDEN LIVING ANNUITY
NFMW has made three specially-designed portfolios available exclusively to retired NFMW members for their “out-of-fund” living annuity needs. Taking this option means that the member’s capital will not be invested in the standard NFMW investment portfolios and will attract slightly higher fees (but still lower compared to other retail solutions and platforms). However, members will not be limited in terms of their withdrawal rate i.e. any withdrawal rate between a 2.5% minimum or 17.5% maximum may be chosen. This may provide members with more flexibility in terms of income levels given their own personal circumstances.
The available investment portfolios aim to increase the real value of a member’s capital over time and are available on the MMI-investment platform in a similar way to the NFMW-investment portfolios that you are familiar with. The choice of portfolio/s will depend on your risk profile, investment term and income needs, which can be assessed by an independent financial adviser.
NFMW-high income: This portfolio is suitable for retired members with a high-income need (>10%) and should provide low capital growth with low levels of volatility. The portfolio is divided between three components, namely income generating funds (54%) for the income needed, defensive funds (30%) for stability and growth funds (16%) for capital appreciation.
Due to the high-income need, this portfolio has a higher exposure toward income-generating funds.
NFMW-medium income: This portfolio is suitable for retired members with a moderate-income need (7% - 10%) and should provide long-term capital growth with moderate to high levels of volatility. The portfolio is divided between three components, namely income generating funds (30%) for the income needed, defensive funds (40%) for stability and growth funds (30%) for capital appreciation.
Due to the moderate-income need, this portfolio has a higher exposure toward defensive funds.
NFMW-low income: This portfolio is suitable for retired members with a low-income need (<10%) and should provide long-term capital growth with moderate to high levels of volatility. The portfolio is divided between three components, namely income generating funds (15%) for the income need, defensive funds (35%) for stability and growth funds (50%) for capital appreciation.
Due to the low-income need, this portfolio has a higher exposure toward growth funds.
The services of an in-fund consultant (with contact number (012) 743 3000) are available to assist in providing members with a better understanding of these post-retirement products.
Information is also published on the fund’s website, mailers, newsletter and annual report.
Members are welcome to contact the fund should they require any further information on the default investment, preservation and annuity options.
National Fund for Municipal Workers