Fees make or break pensions
• A 2% fee on a R5m annuity amounts to R8,000/month
The fees one pays on savings products can be the difference between having sufficient finances at retirement or not, and high fees are systemic across the life insurance industry, analysts say.
As a social media storm around a disputed payout at Old Mutual broke out last week, some users on X (formerly twitter) expressed unhappiness with the low amount paid out by retirement or education policies compared to their expectations.
One X user, @rmotsamai, (https://twitter.com/rmotsamai) called Reginald Motsamai, accused the financial services provider of being a “scam”.
He posted: “My father paid them R250 to R500 per month for 17 years only for him to get paid about R26,000 for my university fees.”
Many people do not realise that fees on many products across providers can take up a significant portion of their payouts.
Gryphon investment analyst Casparus Treurnicht said: “It is no secret that the life insurers charge hefty fees when it comes to investing policies and accumulated savings.
“The public have great reason to be angry. These policies are some of the most expensive ones available, and make the life insurers wealthier than their clients.
“What is the purpose of investing for the longer term if fees erode most of the benefit?”
For two years, investor, former banker and social media personality Koshiek Karan has been urging his thousands of followers to calculate the fees they pay on all savings products across all financial services providers.
He said the issue of high fees is systemic. “There’s a systemic issue across financial institutions extending far beyond a single player. Excessively overpaid fund managers, exorbitant product fees and underperforming products are far too commonplace.”
As people become more aware of the fees they pay he expects more social media storms.
“With more retirement horror stories, improved financial literacy and dialogue calling for transparent fees, expect more underperforming funds to be flushed out.”
André Tuck, team leader for retail investments at 10X Investments says he has been examining fee structures at different providers for 30 years as part of advising clients and doesn’t expect to be amazed at some of the fees. Yet he says: “I am still amazed.”
“Few retirees realise the fees they pay on their living annuity could well be their single biggest expense in retirement. For example, a 2% fee on a R5m annuity amounts to more than R8,000 a month.
Speaking about uncertainty of investments, he said: “The only thing that is guaranteed with any certainty is the fees you pay.”
Melanie Rossiter-Williams, senior policy adviser at Asisa, said that in 2017 the organisation had driven an industry-driven initiative to improve communication and disclosure of fees. This required all providers to disclose the effective annual cost (EAC) of each policy.
Tuck urged people to find out what the EAC of each product was as it added up the different fees into one figure.
Rossiter-Williams said the EAC “provides a common framework for Asisa [Association for Savings and Investment SA] members to disclose charges, enabling customers to compare the charges of different types of products from various providers more easily”.
Tuck said he spent the past week helping a colleague understand the fees she was paying on retirement products, and worked out it was 5.7%
This meant that if her return was 6% a year, most of that was eaten up by fees and her investment would grow only 0.3% in value.
Treurnicht said he considered any fee above 1% of the funds’ value to be high. “I consider anything above 1% as expensive unless very good performance is consistently achieved above market indices and not peer funds.”
Tuck said that internationally 90% of investors used index trackers and passive investment managers such as Blackrock and Vanguard that typically had lower fees than actively managed funds.
Index tracking and passive investment had “slowly been gaining momentum in SA over the past five to 10 years. Clients are doing a lot more homework”.
Tuck said: “There is a huge difference in fees charged between traditional life insurance companies such as Sanlam, Old Mutual and Liberty and the pure investment firms like Ninety One, Allan Gray and 10X.”
But he said people had begun to realise they could choose savings products.
Old Mutual Wealth MD Farhad Sader said his firm’s fees were competitive and “in line or better than industry standard across all our products, including retirement funds. Across the industry, fees on investment products, including RAs [retirement annuities] and retirement funds, have come down tremendously over the last decade, as automation and IT advances have helped lower costs.
“We also have a variety of mechanisms for customers to choose options which lower the fees they pay, such as cheaper index funds, consolidating their pension funds onto one platform and benefiting from maximum rand fees, or lowering administration costs through their fund choices.
“Of course, any fee diminishes fund value — but it’s impossible to provide a product for free. We try to provide our solutions as efficiently as we can, to charge the customer as little as possible while still making enough to stay in business.”
Asisa said disclosure and communication about fees had improved over the past decade.