Other consequences to consider
Mass exits also create a challenge for trustees considering the appropriate investment strategy to adopt. Mass exits usually arise in poor economic conditions, which are often also reflected in poor financial markets. This, in turn, may result in a reduction in members’ accumulated savings at the point when they may need to access these benefits to survive a period of unemployment. This locks in market losses to the detriment of the members.
The difficult question for trustees in these circumstances is whether to change the fund’s investment strategy to provide capital protection, at the expense of the fund’s longer-term strategy. Although theoretically appealing, in reality, the trustees are unlikely to know which members will be affected by the downsizing and which will not. Any change in investment strategy will then also have an inherent risk to the members who remain in the fund, as they will either enjoy profits or sustain losses as a result of the temporary change in the investment strategy.
Implications
The impact on the individuals affected has been explored in some detail above. With planning, the consequences can be managed to some extent. There are also longer-term implications for the government because of increased dependence on state benefits. Mass exits also have an impact on those who survive the process and retain employment, although not as dramatic. After mass exits occur, employers and industries are left with smaller retirement funds with reduced membership and fewer assets, which can lead to a loss of the benefits of economies of scale. This then drives up per-member administration, investment and risk-benefit costs and, at the extreme, can potentially threaten the financial viability of the retirement arrangement.
Under these circumstances, it is critically important for the employer and trustees to conduct a full review of the benefit arrangements to decide which services and benefits are truly value-adding and necessary, to make sure the arrangement remains as cost-effective as possible. A conversion from a stand-alone retirement fund arrangement to an umbrella fund might relieve the loss of economies of scale. Offering members fewer choices may help keep costs to a minimum.
If compulsory preservation were to be implemented as part of the retirement fund reform process, the framework will be significantly tested where mass exits occur due to a decline in industry or even a downsizing of a particular employer. With limited access to accumulated savings to provide for urgent financial needs, the unemployment insurance support system would need to be bolstered. Otherwise, there is likely to be great unhappiness among affected members who are not able to meet their urgent financial needs while having savings preserved for their retirement.