Government’s plans to bring down the costs of your retirement investments

National Treasury is determined to bring down the costs of saving for retirement, which, with some individual life assurance products, are among the highest in the world.

While not wanting to actually regulate how much may be charged by providers, it wants cost structures to be simplified, with limits on what charges can be applied.

Treasury wants to ban things such as:

Loyalty bonuses that are paid but only if you stay invested for long periods. The loyalty bonuses come from high administration charges which are partly “refunded” to policyholders and retirement annuity members who remain invested for long periods.

Penalties that the life assurance company levies if you reduce or stop paying your contributions.

Fixed-rand monthly charges, such as policy fees.

Confusing asset manager performance fees, which are often charged on top of annual asset management fees and result in asset managers collecting fees simply as a result of market movements.

Treasury also wants to remove the confusion surrounding costs that make it almost impossible for anyone to compare the costs of one retirement savings product with those of another.

It wants all costs, including those charged on different investment layers, to be standardised, and it wants the Financial Services Board to keep a close check on the charging structures.

OTHER PROPOSALS

In the presentation this week to representatives of the financial services industry, Treasury said other draft proposals included:

Improvements in the governance of umbrella retirement funds. These funds, provided by the financial services industry, aim to provide cost-effective occupational retirement savings facilities for the employees of smaller employers by allowing numerous employers (participating employers) and their employees to contribute to the same fund.

Among the changes Treasury is recommending are:

The formation of employer-level management committees on which both employers and employees would be represented to give employees a greater say in the management of their retirement savings; and

The banning of umbrella fund rules that make it compulsory for the fund to use the services of a particular service provider. The rules of many funds insist the fund uses the services of its sponsoring financial services company. These typically include the provision of group life assurance and asset management services.

Obligatory default investment options for all retirement funds but with the condition that the defaults cannot be high-cost, complex products that impose significant exit penalties if you wish to switch to a cheaper, or better, option.

Retirement industry funds will be required to have standardised investment mandates and publish performance figures to encourage competition.

A halt to the practice of rebates and kickbacks being paid between various service providers, such as between linked investment service provider (Lisp) administration platforms and collective investment schemes, and between Lisps and financial advisers.

Greater use of lower-cost indextracking asset management instead high-cost active management.