The advantages of economies of scale

RETIREMENT funds have relatively low administration and asset management costs compared with the costs of retail products. Economies of scale dictate that funds, which have many millions or even billions of rands of assets under management, can operate at lower cost than individual investors. Equally, large funds are more cost-effective than small funds.

The 2018 Sanlam Benchmark Survey shows that, for most funds, members of small funds pay higher administration fees (which exclude brokerage and asset management fees) than those in larger funds. The survey found that, on average, a member of a stand-alone fund with more than 10 000 members pays half (R34 a month) what a member of a fund with less than 500 members pays (R68 a month).

It is for these reasons that in-fund post-retirement products, such as a default annuity, which your retirement fund will be required to provide by March next year, may prove to be a no-brainer: even a one-percentagepoint difference in costs between an in-fund annuity and a retail annuity could make a huge difference to your lifestyle in retirement and to how long your money will last.

When it comes to providing annuities, “big funds using their muscle can actually bring a lot of value for retirees”, said David Gluckman, head of special projects at Sanlam Employee Benefits.

He used the example of someone retiring with a lump sum of R5 million, who could reasonably expect an income of R25 000 a month from that amount. “If you can save one percent a year – and for a big fund a saving of one percent a year is very realistic – that would translate into an extra R50 000 a year or more than R4 000 extra per month, which is a very material improvement to retirement outcomes.” according to the regulations.) This is because there may be a mismatch between your pre- and postretirement investments, especially if you are 100% in cash on the day you retire (41.4% of stand-alone funds and 27.7% of umbrella subfunds indicated that this would be the case in their default lifestage portfolios).

“We believe that one’s preretirement investment strategy should closely align with one’s post-retirement annuity strategy, in order to minimise the risk of a mismatch involving your assets (how much you have accumulated) and your liabilities (the income you need in retirement),” Maharaj said.

He said the research shows that less than half of retirement funds don’t explicitly align the preand post-retirement investment strategies, and that before the default regulations come into effect next year, funds will have to re-evaluate their investment and annuity options and make sure they are aligned.

martin.hesse@inl.co.za