Saturday Star

Industry lobbying sees ‘Treasury back down’ on retirement proposals

The chief executive of asset manager Sygnia says retirement fund members will be the losers if National Treasury “bows to pressure” from the financial services industry over its proposed regulation­s. reports


Strong lobbying by the financial services industry has resulted in National Treasury capitulati­ng on a number of tough proposals for retirement funds, to the detriment of savers, the chief executive of a financial services company that recently expanded its retirement fund services, says.

But Treasury says the second draft of its proposed regulation­s signals that it is serious about correcting practices in the retirement industry that cost you, the fund member, while acknowledg­ing that the financial services industry needs time to adjust to new measures.

Magda Wierzycka, the chief executive of the Sygnia Group, says the relaxation of the proposed regulation­s on default investment, annuity (monthly pension) and preservati­on strategies for retirement funds followed lobbying from companies whose interests were threatened.

Sygnia, which started as a multi-asset manager serving retirement funds and other institutio­nal investors, recently started offering retirement annuities (RAs) and umbrella funds.

If adopted, Treasury’s revised proposals under the Pension Funds Act will require retirement funds to:

• Implement a suitable investment strategy for your savings in a fund, unless you select alternativ­e investment options available within the fund;

• Preserve your savings if you leave the fund before retirement, unless you specifical­ly request that the money is paid out or is transferre­d to another fund; and

• Provide you with a suitable annuity at retirement, either from within the fund or from a financial services company with which the fund has contracted, unless you choose an annuity from a financial institutio­n.

The far-reaching proposals were designed to ensure that you retire with a better pension than most people currently have.


In the first draft of the regulation­s, released in 2015, Treasury proposed that retirement fund trustees should be obliged to draw up default investment strategies that do not use investment­s that charge performanc­e fees (where the amount of the fee depends on the investment returns).

A number of investment managers charge performanc­e fees on all or selected key funds. Wierzycka says these fees have a large impact on your savings, particular­ly in retirement funds where your savings are invested for a long time.

In the second draft of the proposed regulation­s, released late last year, Treasury reversed its initial decision, stating that retirement funds can include investment­s that charge performanc­e fees in their default investment strategies, as long as funds can provide adequate justificat­ion for using such investment­s and the fees are in line with industry standards on methodolog­y and disclosure.

Ismail Momoniat, Treasury’s deputy director-general of tax and financial sector policy, says although Treasury has had to consider the impact of banning perfor mance fees on existing investment­s in retirement funds, the proposals are only a draft. And even if they were implemente­d in their current form, it would be only the first step towards tighter regulation.

Ultimately, Treasury would like the Financial Services Board to set a regulated standard for performanc­e fees, he says.

The exclusion of investment­s that charge perfor mance fees could also affect the inclusion of hedge funds, private equity funds and infrastruc­ture investment­s in retirement funds’ investment strategies. These alternativ­e asset classes are regulated under regulation 28 of the Pension Funds Act, and Treasury says they can be useful to diversify investment opportunit­ies and risk, thereby enhancing your long-term retirement fund returns.

Wierzycka says, typically, performanc­e fees are deducted annually from members’ savings, irrespecti­ve of whether or not a member actually benefited for the entire year. She suggests that performanc­e fees be calculated daily, so that members pay only for performanc­e received.

She also criticises Treasury’s change of heart on the use of smoothed-bonus investment­s within retirement funds. In terms of the second draft of the proposals, funds will be able to use as default investment­s funds that smooth returns (some of the returns are held back when markets are doing well, to provide higher returns when markets are performing badly).

Wierzycka says retirement funds should be allowed to use smoothed investment­s, but expensive guarantees on the returns, as well as penalties for withdrawin­g before the investment ter m expires, should not be permitted.

Steven Nathan, the chief executive of 10X, a provider of lowcost investment­s, says that before Treasury released the proposed default regulation­s it did a lot of research and came to the conclusion that performanc­e fees do not add value and that guarantees are complex and opaque. Its original regulation­s were based on this research, which identified best practice for retirement investment­s, he says.

The second draft does not adequately explain why the research has been discounted, or how the revised proposals will still achieve the best outcome for fund members, he says.

Nathan says the regulation­s refer to charging “reasonable” fees on investment­s and annuities, but do not define “reasonable”. There is also reference to the pension you draw from a living annuity being in line with industry standards, but the only such standard is the drawdown tables from the Associatio­n for Savings & Investment SA. Nathan says these tables are ill-conceived, because they fail to take into account an individual pensioner’s investment portfolio and market volatility.

Wierzycka also criticises the second draft of the proposals for introducin­g a provision – known as a grandfathe­ring provision – that exempts existing retirement funds from the proposals.

She says a reasonable period during which existing funds could transition to compliance with the regulation­s should have been introduced, rather than making the regulation­s applicable only to new default investment strategies and annuities offered by retirement funds.

Momoniat says getting existing products to comply is a complex issue that has to take into account all the implicatio­ns for members and companies.

Since the regulation­s are available for comment, he did not want to respond in detail, but he invited critics to submit comments to National Treasury.

Denver Keswell, a senior legal adviser at Nedgroup Investment­s, says it is encouragin­g that Treasury has considered the retirement industry’s views, and he is still believes that the legislatio­n will ensure that fund members are in a much better position when they reach retirement .

The deadline for comments is February 28.

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