Mark Weaver: End of the gold-plated weather for work super schemes

The sun is setting on the golden age of guaranteed income for life company pensions. Photo / Thinkstock

Opinion

Over the next two years New Zealand's, already-declining, traditional employer-based superannuation sector will fade further under regulatory pressure. Melville Jessup Weaver principal, Mark Weaver, explains why members and trustees need to manage the sunset-transition with care

For most New Zealanders the concept of a company pension belongs to the mythical past: the golden era where a job-for-life was rewarded by a guaranteed-income-until-death.

But as recently as 25 years ago almost 3,000 superannuation schemes roamed the land, supporting the retirement dreams of close to 550,000 Kiwis.

A quarter of a century later a mere 457 super schemes remain while membership (including those receiving pensions) has slumped to about 380,000, according to figures from the Financial Markets Authority (FMA).

The dramatic decline in super scheme numbers reflects a long-running trend that saw many employers fold their stand-alone company retirement funds into pooled externally-managed products labelled 'master trusts'. The launch of KiwiSaver in 2007 only quickened the natural consolidation process with many employers happy to cede retirement funding worries to the government-mandated scheme.

And the final blow to the employer-super sector has come in the form of the Financial Markets Conduct Act (FMC), which came into effect late last year.

Under the FMC all super schemes face much tougher (and more expensive) compliance obligations. While schemes have until December 2016 to comply with the new regulations, most trustees are already grappling with the issues thrown up by the FMC.

For many, particularly the 100 or so schemes with under $50 million (totalling about $1.4 billion and 21,000 members), the logical answer will probably be hand over control to a master trust or wind-up the operation.

However, as a recent MJW newsletter explains, the FMC-related choices are more difficult to answer for defined benefit (DB) schemes.

Now an almost extinct species worldwide, DB schemes provide the classic 'gold-plated' pension to members: a guaranteed retirement income-for-life usually based on a percentage of final-year salary. (Today, defined contribution - or DC - super schemes dominate. DC scheme retirement payouts depend on contributions plus whatever investment returns the fund has earned.)

Interestingly, 73 of the 101 employer-based super schemes with funds under $50 million are of the DB variety. Trustees of these DB schemes face some tough choices under the FMC regime as they need to honour the - sometimes generous - lifetime income promises to members - which rules out the simple option of folding into a DC-oriented master trust.

Smaller DB schemes really have only two options to consider: wind-up and purchase annuities (which provide guaranteed retirement income) for members, or; gain consent of all members and current pensioners to wind-up the scheme in return for a cash payout.

Unfortunately, option one is off the table right now as New Zealand's single annuity provider, Fidelity, shut down this service last year. Other insurance firms may eventually fill the niche but even when they were available annuities were an expensive choice.

But over 2015 trustees and members of all DC and DB employer-schemes (several also include both types) will be weighing up their options. And it's important they make decisions in the best interests of their members, rather than on the commercial considerations of service providers: independent advice is critical.

The golden weather for the employer-based super funds in New Zealand may have ended last century, but with over $15 billion under management and almost 220,000 members to care for, the sector still deserves a few more years in the sunlight.

Mark Weaver is principal of Melville Jessup Weaver, a consulting actuarial firm that advises a of financial institutions and investors on asset allocation and fund selection.