What will the retirement landscape look like in 2036?

Last week, my daughter attended her last formal day of high school. As the famous song goes, it was joy and pain, like sunshine and rain. One highlight of the day was when she and the other matriculants in her class had to say goodbye to their “grade one buddies,” who will only matriculate in 2036. The year 2036, on the one hand, sounded like a date somewhere in the distant future, but at the same time felt remarkably close, especially if you are planning for retirement around that time. 

I asked myself the question, what will our retirement landscape look like in 2036 when the grade one buddies matriculate? What are the things that will drive better retirement outcomes, and what are the things that will prevent them? If I had a crystal ball to predict the future, based on my current understanding of the good and the bad of the retirement funding industry, I would predict the following scenario in 2036:

1. A tightly regulated retirement funding industry. The basis for a more robust regulatory environment was introduced with the promulgation of the Financial Sector Regulation Act, which created a prudential regulator and a market conduct regulator. The Conduct of Financial Institutions Act will broaden the powers of regulators and increase the accountability of all players in the financial services industry. 
2. Retirement fund membership for all employees working in the formal economy will be mandated to force employers to ensure that every employee in the country has access to appropriate retirement saving vehicles and thus reduce the number of retired people who will have to depend on government pensions after retirement.  This will be done with the introduction of further tax incentives, as well as further restrictions on accessing retirement savings before retirement. The two-pot system will become a one-pot system, namely a retirement pot. 
3. There will be two types of employment-based retirement funds, namely closed and open funds. Closed funds will be funds that limit fund membership to employees of a specific employer or a group of related employers, and all employees would be compelled in terms of their contracts of employment to become a member of that particular closed fund. Open funds will be similar to the current umbrella funds, where unrelated employers have the choice to participate. The big difference will be that, where employers are currently allowed to participate in only one umbrella fund, they will automatically have to participate in all registered open funds and thus allow employees to freely participate in and move between open funds during and after their periods of employment.  Member choice will therefore be extended to fund participation choice and not limited to the choice of investment options within a fund.
4. The level of fund contribution payment compliance by employers will be significantly higher as the name and shame strategy that is currently used by regulators to publish the names of employers who default on contribution payments will be replaced by a zero-tolerance policy enforced through criminal prosecution of employers who wilfully or negligently fail to make fund contributions. 
5. Fund members will have more options, but less control. Fund members will be able to move between open funds and will have a larger range of investment options. Open funds will, however, no longer be legally required to have member-elected trustees, and the product owners of such open funds will have full management control of the funds as well as the responsibility for ensuring the viability of the retirement funds. 
6. Regulation 28, which currently limits investment options, will no longer be applicable as funds and members will be allowed to create individualised investment strategies that will lead to the best possible outcomes for each member based on their personal risk and investment profiles.
7. Fund information and retirement advice will be digitised to improve retirement fund administration efficiency. Human interaction with fund members will be limited as the roles of the fund benefit counsellors and financial advisors evolve, and fewer members will have access to face-to-face interaction with financial advisors and fund benefit counsellors.
8. The increased operational costs of retirement funds, driven by the increased cost of business and regulatory compliance, will lead to market consolidation. Fewer market players will limit the options of members, even though the portability of retirement savings is possible. Product provider profit models will be built around the total income value of a fund member through the vertical and horizontal integration of financial services and communication services. Product owner group of companies based integration of retirement funds, medical schemes, long-term insurance products, short-term insurance products, asset management, investment products and services, banking services, credit provision, loyalty programmes, as well as cellular and other communication services will lead to a lock-in of fund members into a financial ecosystem that cannot easily be escaped.

Looking forward to 2036, I see a retirement savings industry that is better regulated, that provides a good trade-off for members between fund control and individual choice by allowing members to move freely between retirement funds, and that will ultimately lead to better retirement outcomes on an individual member basis.  The ability of fund members to vote with their feet will keep product and service providers in the retirement industry on their toes as they will have to prove, daily, that they are adding value to the lives of fund members.

* Ladouce is a pension fund lawyer and the author of the book ‘Pensions for Palookas’.

PERSONAL FINANCE