THE DIFFERENT MEASURES OF COSTS

National Treasury says one of the significant problems in dealing with the charges that are levied on your retirement savings is that there is no one standard measure that accurately enables you to compare the effect of charges on different retirement products.

The problem is exacerbated by the fact that there is not always full disclosure of all charges, and the structures used are complex and often misleading.

For example, an upfront initial charge of three percent of your contribution may seem much higher than an ongoing annual charge of one percent of your accumulated savings. In fact, the one-percent annual charge is going to result in you paying substantially more in the end.

Treasury points out that there are four cost measurement methods in common use. These are:

Reduction in Yield (RiY). This is the amount by which your savings could be reduced annually by costs, based on various assumptions such as contributions and investment returns, which may or may not occur.

Reduction in Maturity Value (RiMV). This is the amount by which your retirement savings could be reduced over the full saving period, again based on various assumptions, which may or may not occur.

Accounting Cost of fund Assets (ACA). This is similar to the Total Expense Ratio used in the unit trust industry, which totals most (but not all) actual costs charged against a fund.

Accounting Cost for each Member (ACM). This is similar to the ACA but is calculated as a monthly rand amount for each retirement fund member.

Treasury says all four measures struggle to reflect accurately the impact of conditional charges such as guarantee charges, performance fees and surrender charges. One way around the problem, it suggests, is to reduce complexity by regulating the type of fees that may be charged, for example by banning performance fees, and placing limits on certain charges.