Should the arrival of the Two-Pot Retirement System change the way employers and retirement fund trustees (and we as the custodians of their investments) think about the choice of default investments within retirement funds?
It’s an important question because, with the Two-Pot system now locking in two-thirds of a retirement fund member’s future contributions until retirement, a member’s funds will not be accessible in the same way over their lifetime as it was before.
How default strategies will change
AGP 80 has for several years been the default investment strategy in SuperFund Choice, our flagship umbrella fund offering. Making use of a smoothing mechanism to protect against market fluctuations, AGP 80 guarantees 80% of a member’s investment when they retire or withdraw from the fund before retirement, regardless of whether the markets are in a slump at that point or not.
But what happens in the new Two-Pot world? Is it still the most appropriate default choice, with members enjoying an 80% guarantee but also paying the related costs for that?
Old Mutual and the SuperFund trustees believe that AGP 80 remains an appropriate default option for many members and organisations, as the 80% guarantee continues to be a key protector against market downturns. But we also believe that employers participating in SuperFund should have more choices post-Two-Pot and actively choose the most appropriate default for their employees.
Going forward, employers who join SuperFund can choose between six trustee-approved default options:
Single Portfolio defaults:
AGP 80
Albaraka (for Muslim clients)
Life Stage defaults:
Smooth Life Stage
Multi-Manager Life Stage
Retirement-driven Investment Life Stage
Index-tracking Life Stage
All six of these defaults have been approved by the Management Board of SuperFund.
The importance of employer and intermediary participation
Old Mutual doesn’t want employers and their retirement funds to simply ‘fall into’ a default option. We’d like every participating employer, with the help of their intermediary, to consider their membership carefully and choose the most appropriate default.
However, in the event that a new joining participating employer doesn’t choose a default, a member will now default into the Smooth Life Stage strategy instead of the AGP 80 strategy.
Who the change applies to
It’s important to remember that this change in default only applies to new participating schemes signing on that don’t actively choose a default strategy. Any client that has already chosen a default, or chose the previous trustee choice AGP 80, prior to 1 September, remains with this default strategy.
When advising your clients as an intermediary or considering your default options as an employer when signing up with SuperFund, it’s important to remember that there’s no one-size-fits-all in a Two-Pot environment.
Instead, take the time to carefully consider the business’s unique membership, the sophistication of its members, the level of understanding, the industry they’re in, and their specific risk profiles, to choose the right default.
Fred van der Vyver is Old Mutual’s General Manager – Savings and Income.
Read more about the Old Mutual SuperFund here, and if you have any questions, let’s talk.