RA fees remain murky issue

COMPLEX PRODUCTS: MAKE COMPARING COSTS VERY DIFFICULT

A year after its introduction, some benefits from the Effective Annual Cost standard have yet to be seen.

A year after a standardised cost measure was introduced, comparing fees across retirement annuities is still a challenge.

Ayear after the Association for Savings and Investment South Africa (Asisa) introduced the Effective Annual Cost (EAC) standard, some benefits from its direct cost comparisons have yet to arrive.

The idea was to provide a standardised measure across the industry to compare “apples with apples”. All costs have to be disclosed in certain brackets and expressed as a percentage of assets invested.

Many products have layered costs that are very difficult for investors to understand. Setting a uniform standard was therefore a big step.

But it hasn’t delivered the neat solution many were hoping for.

A Business analysis of low-cost retirement annuities (RA) providers and what they would charge on a lump sum investment proved to be fairly straightforward. The EACs allowed for a simple comparison. These products were all fairly similar. Each of them offered an investment into an underlying fund through an RA platform. With no advice fee, that was all that needed to be considered.

But the same analysis of life insurers was a little more complicated. It was not so easy to get EACs out of some insurers.

Our immediate concern was they were reluctant to show true costs or they were trying to hide something.

But deeper digging revealed a genuine desire to reform, reduce costs and be more transparent.

Old Mutual figures showed a lump sum invested into the South African Retirement Annuity Fund through their XtraMAX solution could cost as little as 0.3% over five years, before advice fees.

The problem is complexity. In many of these products there is a lot more going on inside them, making an EAC measure a little less effective.

Many products offer guarantees, for example, or bonuses for remaining invested. So how do you quantify their value?

Many offer “premium holidays” in the event of financial difficulties. These are not standardised. Momentum’s Investo RA allows investors to skip four months without penalty, while Sanlam’s Cumulus Echo allows 12 months.

Some RAs may also continue to pay your monthly contributions if you become disabled. Again, such value can’t be captured by a glance at an EAC.

The EAC is not a failed concept, but it doesn’t tell you everything.

Cancellation costs

Certainly, it highlights early termination costs. Sanlam numbers say products from some providers would cost as much as 34% of the invested amount if they were cancelled after the first 12 months.

These costs reduce significantly over the life of the product, and could become competitive if the RA runs to a full term over 25 years. They are a reminder that the flexibility and simplicity of unit trust-linked RAs have become appealing for good reason.