Retirement fund charges in spotlight
Discussion paper sets out proposals for a fairer deal
THE National Treasury this week released the fifth and last discussion paper intended to lay the groundwork for retirement industry reform.
Although overdue and appearing last in the series, this technical discussion paper on charges in South African retirement funds was scheduled to be addressed first and is arguably the most important to date.
At a media briefing, Ismail Momoniat, deputy director-general: tax and financial sector policy, introduced the paper by saying the points for discussion in the 81-page document would begin “constructive engagement” between the government and the industry and it would hang together with several other pieces of legislation that would filter through the country’s financial landscape for the next four to five decades.
These include harmonising the tax treatment of retirement savings, uniform contributions and the Treat Customers Fairly initiative.
It is telling that when National Treasury retirement policy specialist David McCarthy presented an analysis of the cost structures of South African retirement funds, he said specific examples had been omitted to avoid embarrassing certain service providers.
While the government does not yet “have a view” of what the retirement funding landscape may look like in 10 years’ time, there are certain problems it insists be addressed.
The first bone of contention, McCarthy said, was differentiation between what it actually costs to run a retirement fund and the charges that fund members end up paying.
While there were costs that funds would incur, such as for lawyers, auditors and asset custodians, McCarthy said members were sometimes paying charges out of their contributions or assets in fee structures which were too high and too complex.
Charges could sometimes reduce members’ returns by 50%, he said, which meant people could get the same return with half as much money if the recurring fees disappeared.
Recurring charges are a particular problem. McCarthy said it appeared that some funds were deliberately running at a loss for the initial administration involved in getting members to join, in order to inflate the assets under their control on which they could charge ongoing fees. “Charging a mem- ber a larger initial fee, while waiving the ongoing fees, will have much less impact.”
He also said the South African retirement system appeared expensive compared with international counterparts, even though there were inherent difficulties in comparisons given that every country had unique systems.
McCarthy said South African service providers seem to rely solely on market mechanisms to determine the type and the
The South African retirement system appears expensive
level of charges.
“Despite the relative maturity and depth and level of development of our capital markets, the industry is expensive. Retirement provision is still voluntary in South Africa, which leads to direct and indirect costs of people and employers finding products,” McCarthy said.
In a marketplace where service providers needed to sell products aggressively, this meant extra complexity with sales agents, advisers and consultants all taking a cut, which ultimately costs the fund member money because funds shift the costs to the member base.
“In countries where retirement saving is compulsory, people can still switch between providers while the assets remain in the system.”
While McCarthy said South Africa was not alone in searching for a solution to this problem, we simply have too many funds with a low rate of preservation and poor governance plaguing the smaller end of the fund scale.
This is not all the service providers’ fault. The high unemployment rate, tendency of members to cash out retirement savings when moving jobs and a low volume of overall assets under management means the thousands of funds in South Africa have few members among whom to spread the costs they incur.
Part of the National Treasury’s proposed solution is a government-run retirement fund, which will be the default option for all workers who do not specify an alternative private-sector fund as their savings vehicle.
McCarthy said there were a few options up for discussion, including outsourcing the management of such a fund to the private sector on a tender basis, or running it in-house. This could be made practical on the back of the existing interface infrastructure between employers — even micro-enterprises and people who employ domestic workers — and SARS.
While fund costs have, by and large, been reducing, National Treasury must still rely on the industry to provide information on the reasons costs are incurred and what those costs are. It will be a cat and mouse game as the government tries to force the sector to consolidate.
“The way costs are recovered from members needs to be standardised and must be more competitive. The regulator must counter market forces,” McCarthy said.
Forcing disclosure within cost structures would provide the necessary pressure to reduce costs, he said.
“The asymmetry of information held by the product designer and the buyer leads to an ability to overcharge and to introduce unnecessary complexity,” McCarthy said.
Service providers have until the end of September to comment on the paper.