Funds ne­go­ti­ate lower-cost pen­sions

Trus­tees se­cure lower in­sti­tu­tional rates of­fered to big in­vestors

Sunday Times - - Money - By LAURA DU PREEZ [email protected]­soblack­

● Re­tire­ment funds are se­cur­ing pen­sions at sig­nif­i­cantly lower costs than those you will be of­fered as an in­di­vid­ual when you need to se­cure a monthly in­come af­ter you stop work­ing. These lower costs — any­thing from 0.6% to 0.9% a year — will give you a higher pen­sion or an in­fla­tion-linked in­come for longer in re­tire­ment.

David Gluck­man, chair­man of San­lam Um­brella Fund’s in­vest­ment com­mit­tee and head of spe­cial projects at San­lam Em­ployee Ben­e­fits, said funds’ de­fault pen­sions or an­nu­ities could save mem­bers about one per­cent­age point in costs a year.

Alexan­der Forbes says its new re­tire­ment in­come prod­uct, avail­able as a de­fault an­nu­ity op­tion for funds, saves on av­er­age 0.63 per­cent­age points on costs when com­pared to other an­nu­ities you, as an in­di­vid­ual, can get from other providers.

Funds are re­port­ing these out­comes ahead of the March 2019 ef­fec­tive date for reg­u­la­tions that will force trus­tees to choose suit­able an­nu­ities for re­tirees rather than leav­ing mem­bers to find their own prod­ucts.

Funds will choose de­fault pen­sions for re­tir­ing mem­bers, but mem­bers can still choose their own pen­sion providers.

The reg­u­la­tions are set to dis­rupt the re­tire­ment fund and fi­nan­cial-plan­ning in­dus­tries. They also oblige funds to set de­fault in­vest­ment strate­gies for both pen­sions drawn from sav­ings — liv­ing an­nu­ities — and pre­re­tire­ment sav­ings. In ad­di­tion, funds will be obliged to pre­serve your sav­ings in the fund when you leave a job un­less you re­quest the money be paid out or trans­ferred.

The lower costs on de­fault pen­sions are a re­sult of trus­tees se­cur­ing lower in­sti­tu­tional rates of­fered to larger in­vestors. In ad­di­tion, if you choose a de­fault pen­sion, trus­tees are cap­ping the fees payable to fi­nan­cial ad­vis­ers who ad­vise you on that prod­uct, which may also in­crease your pen­sion in­come.

Um­brella funds com­pete

Um­brella funds, home to mem­bers from mul­ti­ple em­ploy­ers, com­pete for com­pa­nies’ em­ployee ben­e­fits busi­ness and their de­fault an­nu­ities are likely to be an­other fea­ture on which they will at­tempt to outdo their ri­vals.

Anna Si­wiak, head of prod­uct de­vel­op­ment at San­lam Em­ployee Ben­e­fits Um­brella So­lu­tions, said a quote she ob­tained for a pen­sion from R2m in­vested in the San­lam Um­brella Fund’s liv­ing an­nu­ity showed it would cost 2.3% a year when the max­i­mum ad­vice fee was ap­plied. This was 0.93 of a per­cent­age point sav­ing a year when com­pared to a liv­ing an­nu­ity pro­vided by an­other in­vest­ment house.

The costs in­clude an ad­min­is­tra­tion fee for the in­vest­ment plat­form, an as­set man­age­ment fee and an ad­viser fee, which in the case of the um­brella fund an­nu­ity was capped at 0.86% a year, in­clud­ing VAT, in­stead of the max­i­mum of 1.14% for the annu- ity avail­able to in­di­vid­ual in­vestors.

Though San­lam is of­fer­ing mem­bers what is known as an in-fund liv­ing an­nu­ity — your pen­sion is paid by the fund it­self — other large um­brella funds are of­fer­ing mem­bers “out­sourced” an­nu­ities pro­vided on in­vest­ment plat­forms run by the same group that spon­sors the fund. How­ever, the trus­tees can ne­go­ti­ate cheaper “in­sti­tu­tional” rates on these an­nu­ities.

Michael Prinsloo, ex­ec­u­tive head of in­sti­tu­tional re­search and prod­uct de­vel­op­ment at Alexan­der Forbes, said this is why funds can achieve on av­er­age a 0.63 per­cent­age point sav­ing by choos­ing the Alexan­der Forbes Re­tire­ment In­come So­lu­tion as a de­fault an­nu­ity over an­nu­ities avail­able in the re­tail mar­ket. The Alexan­der Forbes Um­brella Fund has yet to set its de­fault an­nu­ity op­tions for next year, but the fund now of­fers an in-fund an­nu­ity with costs that com­pare favourably with the Re­tire­ment In­come So­lu­tion costs, Prinsloo said.

He said that on R2m in­vested in ei­ther the in-fund an­nu­ity of­fered by the um­brella fund or the de­fault in­come so­lu­tion, costs are 0.8% a year for ad­min­is­tra­tion and in­vest­ments, ex­clud­ing di­rect off­shore ex­po­sure and per­for­mance fees, and about 1.03% with off­shore ex­po­sure and per­for­mance fees.

In­dex-track­ing, or pas­sively man­aged port­fo­lios, are also avail­able and cost about 0.3 to 0.35 per­cent­age points a year less.

Prinsloo said Alexan­der Forbes has also capped the ad­viser fee.

Kather­ine Barker, head of Mo­men­tum’s Fund­sAtWork um­brella fund, con­firmed that the fund was us­ing the Mo­men­tum liv­ing an­nu­ity as a de­fault an­nu­ity but was also sav­ing on costs at in­sti­tu­tional rates.

Hugh Hack­ing, GM for op­er­a­tions at Old Mu­tual Cor­po­rate, said Old Mu­tual’s Su­perFund has two de­fault op­tions, a guar­an­teed with-profit an­nu­ity and a liv­ing an­nu­ity, both pro­vided by Old Mu­tual. The liv­ing an­nu­ity’s de­fault in­vest­ment strat­egy is in Old Mu­tual’s smoothed bonus port­fo­lio, which guar­an­tees 80% of the cap­i­tal at a cost of 0.7% a year. With this fee, the max­i­mum charge for the an­nu­ity is 1.977%, he said.

The de­fault an­nu­ity is cheaper as there is no ini­tial fee or ad­vice fee, he said.

Um­brella funds from Syg­nia and 10X both use their own an­nu­ities, which are in­vested in in­dex-track­ing or pas­sively man­aged port­fo­lios, as their de­faults. Syg­nia deputy CEO Dave Hufton said the Syg­nia Um­brella Re­tire­ment Fund’s de­fault an­nu­ity comes with the op­tion of con­vert­ing all or part of sav­ings into a Life­time In­come Pro­tec­tion port­fo­lio, which pro­vides a guar­an­teed in­come for life.

Track­ers save more

The to­tal in­vest­ment costs for the an­nu­ity us­ing a bal­anced fund that tracks a va­ri­ety of in­dices is 0.64% plus any fee ne­go­ti­ated with your ad­viser, re­gard­less of whether you buy the an­nu­ity through the um­brella fund or as an in­di­vid­ual. On the part which you in­vest in the Life­time In­come port­fo­lio, you will pay an on­go­ing fee of 1.1% and an ini­tial up­front fee of 1.1%.

Chris Eddy, se­nior in­vest­ment an­a­lyst at 10X In­vest­ments, said the trus­tees of the 10X um­brella fund have yet to fi­nalise their de­fault an­nu­ity, but an in­di­vid­ual tak­ing out an an­nu­ity with 10X in­vested in pas­sively man­aged funds would pay fees on a slid­ing scale start­ing at 0.86% on R2m.

Eddy said if 10X In­vest­ments is ap­pointed as a de­fault an­nu­ity provider, the cost is 0.50% — a sav­ing of 0.36 per­cent­age points.

Nei­ther Dis­cov­ery nor Al­lan Gray um­brella funds have de­cided on their de­fault an­nu­ity.

Daniel van An­del, a prod­uct de­vel­op­ment man­ager at Al­lan Gray, said in­sti­tu­tional rates are sim­i­lar re­gard­less of whether the an­nu­ities come from within the fund or are out­sourced to an in­vest­ment plat­form.

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