You should not let the current uncertainty around retirement reform inhibit your willingness to save for your retirement; it is very difficult to make up for lost time. With government's assurances that vested interests will be protected, it makes sense to find a product that meets your needs and to start, or continue, saving even while many questions remain unanswered. Gerhard Klinger and Debbie Ryan look at the suitability of retirement annuities (RAs) for employer-arranged retirement savings, with the Allan Gray Group Retirement Annuity System (Group RA) being a potential answer for small to medium-size businesses looking for a cost-effective way to solve the retirement savings question.
As discussed in Richard Carter's article, two key areas of focus in Treasury's recent retirement reform proposals are preservation and income at retirement. Modern unit trust-based RAs are already structured for income at retirement and to enforce preservation. There are several reasons why an RA works well for individuals who want to save for their retirement. Many of these also make them an appealing choice for small and medium-size business owners looking for a retirement savings solution for their staff.
THERE HAS BEEN REPEATED ASSURANCE FROM REGULATORS AND THE TREASURY THAT VESTED RIGHTS WIL BE PROTECTED
In many ways RAs managed through a group system are a better choice for employers and their employees than other retirement funding options, such as umbrella funds, which have high set up costs and time-consuming administrative requirements. It is our experience that employers prefer to focus on running their businesses rather than burdening themselves with the administrative and legal responsibilities of a pension or provident fund. By selecting a group retirement annuity system, employers can focus on managing their businesses whilst not detracting from the importance of retirement saving for their employees. Group systems, like that offered by Allan Gray, allow employers to ensure that their employees get all the benefits of an individually managed RA. These include:
- Individual accountability and choice
Employees join the RA in their individual capacities and become individual members - with autonomous and member-specific investment choices and options. This gives each member control of his/her retirement savings.
RAs are a move away from the paternalistic culture of traditional pension and provident funds, which often do not offer choice, and tick the box for those who want more control of their investments. Members can select their underlying investment options from a range of unit trusts across different sectors, from different providers. The combination of unit trusts that a member chooses must comply with the asset allocation limits for retirement funds (e.g. 75% in equities, 25% in foreign assets) and should also meet their individual investment objectives. Each member can use the services of their own independent financial adviser if they need help in making their investment decisions, or an employer could negotiate with a single independent adviser to provide unbiased advice to employees.
While we caution against switching too often, members may switch between these unit trusts, as their needs change, giving them flexibility over time.
- Tax efficiency
RAs essentially defer tax until employees retire. The government is planning to streamline the tax treatment of all retirement funds, but the changes currently under discussion will benefit retirement annuity members.
- Value for money
In many 'modern' RA funds, including Allan Gray's, an annual administration fee is charged which is reduced by any fee discounts received from the providers of the chosen unit trusts. There are no initial administration fees, no switching fees and no exit fees. Initial and annual fees for investment management depend on each member's choice of unit trusts. Modern RA fee structures are generally transparent and competitive and offer good value for money.
Gone are the days of life-long employment - today's workforce tends to be highly mobile. RAs under a group system are individually owned, which means employees can either continue contributing if they leave their employer, or they can stop contributing without any penalties. Allan Gray RA members may also transfer their Allan Gray RA to any other FSB-approved retirement annuity fund without penalties or fees.
- Transparency, communication and education
Approaches to communication vary depending on the RA provider. Allan Gray is committed to keeping communications and investment products simple. Members of the Allan Gray RA are sent quarterly statements showing how their investments are performing. They can also monitor and administer their investments by registering to become users of the secure section of our website. This is key in giving members ownership and a sense of responsibility for their investment.
Retirement reform is an evolving process and it is unclear when all the issues will be resolved, but there has been repeated assurance from regulators and the Treasury that vested rights will be protected. Time is very important in long-term savings; each month you put off saving or helping employees to plan for their retirements either increases the amount that will have to be saved at a later stage, or pushes out your or their date of retirement.