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Exemption from Regulation 37(2)(g) in relation to hybrid or blended annuities

What does this mean for retirement funds and members?

On 1 August 2019, the Financial Sector Conduct Authority (FSCA) issued an exemption that allows retirement funds, as part of their annuity strategy, to offer members the option of a hybrid annuity as part of their retirement planning. In terms of the exemption, a hybrid or blended annuity allows members to include a life annuity as one of the investment portfolios within a living annuity.

The exemption results in several positive outcomes for both trustees and members of retirement funds.

  1. The inclusion of a hybrid or blended annuity will afford members a level of longevity protection within a living annuity to cover essential expenses in retirement.

  2. Regulation 39 requires trustees to monitor the sustainability of assets within a living annuity on behalf of members, and the inclusion of a hybrid or blended annuity aligns with their fiduciary duties to ensure that members as beneficiaries of funds are protected post retirement.

  3. Members will now have the flexibility and more options in terms of product choice at retirement. They are now able to split their living annuity to include an income protection portfolio. This is not available in a conventional living annuity, only in blended living annuities.

  4. It gives members the option to consolidate their retirement savings in one investment vehicle.

  5. The exemption introduces an option that should encourage members to appreciate the importance of annuitisation as inclusion of a hybrid or blended annuity allows members to choose in terms of how they would like their retirement savings to address their short and long-term financial needs.

The FSCA has however advised that funds wanting to offer a hybrid or blended annuity as part of their annuity strategy will need to apply to the FSCA for an approval to be exempt from this regulation.

The exemption also comes with some conditions.

  1. The nature of the hybrid or blended annuity must be must clearly communicated (and explained) to the member by the fund during retirement benefit counselling process

  2. The retirement benefit counselling must be done in person and the fund must be able to provide a record that it was agreed to by the member in writing

  3. During the retirement benefit counselling, the fund must specifically inform the member that the member’s life annuity portfolio cannot be transferred to another insurer

For more information and a copy of the application form, please visit the FSCA’s website and view the Exemption from Regulation 37(2)(g) of the Regulations under the Pensions Funds Act.

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