The FSCA released the much awaited Smooth Bonus Conduct Standard (Conduct Standard 5 of 2020 regulating retirement funds) on 9 October 2020 with the conditions for smoothed bonus portfolios to form part of default investment portfolios. This gives retirement funds using a smoothed bonus portfolio as part of their default investment portfolios nine months to comply with the standard.
Given the renewed focus on default portfolios, we believe that the release of the final Smooth Bonus Conduct Standard was timeous and relevant. It also levels the playing field to some extent by ensuring that all insurers provide benefits consistent with the standard. The fee disclosure will also make it easier for members to compare different portfolios.
Sanlam doesn’t have to make specific changes to its portfolios, but we will need to enhance our disclosure in line with the standard. We look forward to engaging with trustees on this over the next nine months
Where does the Conduct Standard fit in?
The Conduct Standard should be read in conjunction with the default regulations issued in terms of the Pension Funds Act during 2017, specifically Regulation 37, which deals with default investment portfolios. This Regulation requires retirement funds with a defined contribution category to adopt a default investment option for members ̶ a trustee endorsed option into which members who do not choose an investment portfolio for themselves are defaulted.
The default regulations always envisaged that further guidance would be issued at a later stage, including a conduct standard for smoothed bonus portfolios, as well as criteria for using a living annuity as part of the fund’s annuity strategy.
What are smoothed bonus portfolios?
Smoothed bonus portfolios aim to protect member’s retirement nest egg while providing stable and predictable investment returns. During strong growth, some of the return earned is set aside, to be used during periods with low or negative market returns. In this way, portfolio returns are smoothed by either releasing investment returns set aside or by holding them back (depending on market conditions). In certain scenarios an insurer will even provide additional funds to the portfolio if the underlying returns are very negative. These portfolios also provide certain guarantees when a member leaves his/her retirement fund, on retirement for example. This strategy is typically chosen by members approaching retirement age or by more risk-averse members who do not want to see their savings yo-yoing as markets go up and down.
What does the Conduct Standard aim to achieve?
The regulatory authority believes that smoothed bonus policies are more complex than normal balanced funds and that they are sometimes poorly understood by members defaulted into them. The Conduct Standard aims to provide additional security to members through requiring much greater disclosure. The standard also reduces an insurer’s discretion and flexibility in some cases.
Although the Conduct Standard is aimed at retirement funds, the insurers providing these smoothed bonus polices will need to ensure that their portfolios comply and give sufficient comfort to the trustees so that they can continue to use these portfolios as a default investment option.
Will the Sanlam Smooth Bonus Portfolios comply with the Conduct Standard?
Definitely. Sanlam started engaging with the regulator in 2017, before the first draft was issued, and provided feedback on the subsequent draft standards, while simultaneously working to make sure that all our main smoothed bonus portfolios that are used as default investment options will comply with the Conduct Standard.
This includes the following portfolios:
- Stable Bonus Portfolio
- Progressive Smooth Bonus Fund
- Monthly Bonus Fund
- SMM Vesting Fund
In the coming months, Sanlam will roll out the enhanced disclosure required by the Conduct Standard. An example of this is the provision of more detail regarding the financial support Sanlam gives to these portfolios when they are significantly underfunded. Certain changes, for example changes to our Principles and Practices of Financial Management (PPFM), require Board approval, which is why the industry requested the fairly long period of nine months for retirement funds to comply with the Conduct Standard.
What are the specific requirements contained in the Conduct Standard?
Firstly, regarding the product rules itself, the insurer should use a formulaic approach to bonuses. This formula needs to be disclosed and there is a limit to how much an insurer may deviate from the stated bonus formula.
The Conduct Standard further requires disclosure of:
- Charges in respect of guarantees provided and other costs
- When and how non-vested bonuses (if applicable) can be removed
- When and how shareholder capital will be provided to maintain the financial soundness of the portfolio
- Minimum and maximum funding levels beyond which remedial action is required
- Management actions taken by the insurer to reduce risk.
Additionally, the Conduct Standard introduces
- Limits to the smoothing periods used
- A maximum long-term funding target
- Limits to when a market-value adjuster can be applied.
The standard also addresses how we disclose our investment philosophy and strategic asset allocation limits. Material changes to strategic asset allocation will require notification to clients and the regulator.
We were initially concerned about the limitations of this section of the Conduct Standard, in case it would limit our agility to respond to, for example, a market crash, but the regulator has assured us that notifying them does not mean that we necessarily need to wait for a response from them before making changes.
Lastly, the Conduct Standard also contains additional requirements relating to the fair treatment of members. Insurers need to ensure that the communication it provides is accurate, relevant, simple and easy to understand. This last point is no easy task given the different levels of financial education of our member base. Sanlam supports the aims of the Conduct Standard and will ensure that the relevant smoothed bonus portfolios comply with the standard. We also believe that the Conduct Standard will give added comfort to retirement fund members who invest in these portfolios.