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The role of asset managers in the retirement reform regime

27 August 2012 Sibusiso Mabuza, CEO of Momentum Asset Management
Sibusiso Mabuza, CEO of Momentum Asset Management

Sibusiso Mabuza, CEO of Momentum Asset Management

As the bedrock of South Africa’s savings, retirement provisions make up the lion’s share of the asset management industry’s assets under management and looming retirement reforms could have a profound effect on the future of the industry.

As policy unfolds in incremental stages, Government’s latest discussion paper on promoting household savings and reforming the retirement industry focusses on two of the three key priorities. Firstly, improving the country’s post-retirement savings situation which, if successful, will be of great benefit to the country as it will reduce State entitlement costs and encourage retirement fund members to make better retirement provision. Secondly, reducing fund costs and charges through price governance and product standardisation. Both priorities appear to have overshadowed the third, namely improving coverage in order to ensure that more South Africans are brought into the retirement net.

Government has made it clear through its discussion documents, proposal and engagement with industry that business can play a substantial role in achieving these objectives. “I believe that government’s plans are both sustainable and necessary, and that is up to the asset management industry to take up the gauntlet and look to providing new solutions,” says Sibusiso Mabuza, CEO of Momentum Asset Management.

For example, in a bid to reduce costs, attention is being given to the greater utilisation of passive investment vehicles in order to reduce the charges associated with retirement product management (brokerage, advisor, performance fees, etc). Government is also looking to simplify and develop standardised products into which members can automatically be placed on retirement, without the need for financial advice.

So, does the drive for simpler and cheaper products mean the end to innovation and product differentiation? Should savers not be put into a situation where advice is compulsory upon retirement? Also, given the diversity of investor needs, is standardisation the most appropriate approach for all market segments?

Although the rationale behind this cost-reduction thinking is understandable, there could be unintended consequences in terms of overlooked return-generating opportunities. As industry, we need to find solutions geared towards reducing costs and generating good returns, as opposed to simply relying on passive investment instruments.

Another stated policy priority that directly affects asset managers is addressing gaps exposed by the global financial crisis. There have, unfortunately, been numerous accounts of investors losing all their savings during the downturn as a result of poor investment performance, inappropriate investment advice, high fees and risky investment decisions, which has put pressure on regulators around the world. “As an industry, however, we do need to be vocal about the balance that regulators need to apply in terms of protection versus cost considerations,” adds Mabuza.

For example, as the age profile of retirement fund members is easily accessible, and considering that an acceptable fund member retirement ratio is known, should asset managers not focus on absolute performance that meets the fund’s objectives as opposed to the industry preoccupation with relative performance?

It is also clear that infrastructure investment, which is an imperative in South Africa, represents a good opportunity to diversify and that retirement savings are a sound source of project funding. Having said that, however, prudential investment regulations and recurrences of the recent SANRAL debacle are scenarios that the country and retirement fund industry would prefer to avoid.

“I believe that the asset management industry can play a meaningful role in contributing towards the new retirement savings framework and welcome the opportunity to do so,” concludes Mabuza.

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