The industry is hard at work

The retirement industry is not only one of the major drivers of the economy, it plays a vital role socially as it is the only savings that many people have towards the second phase of their lives (retirement). Yet, the industry faces many challenges. We need to have open and honest discussions to find suitable solutions.

These were the words of Olano Makhubela, Executive: Retirement Fund Supervision at the Financial Sector Conduct Authority (FSCA), at the opening of the recently held inaugural FSCA Retirement Funds Conference. 

Like a trainer in a boxing match, Makhubela spoke honestly about the enormity of the task ahead. 

Compliance… compliance… compliance

The first issue that Makhubela tackled is the much bemoaned topic of the necessity for regulatory reform. 

Over the past year, the retirement funds industry has had to deal with two key pieces of legislation, the Default Regulations and the new standard by the Association of Savings and Investment South Africa (ASISA) which compels funds to express costs as a percentage of the investors overall investment. 

These are two radically different departure points and issues that retirement funds will need to dedicate a lot of effort to when it comes to compliance. However, past events have left a deep scar when it comes to finances. These events created the necessity for compliance. 

“The move towards Twin Peaks, and the implementation of regulatory reform, was made after the 2008 Global Financial Crisis (GFC) which left many unsure about their investments and damaged trust in the financial sector. We cannot let this happen again,” said Makhubela. 

While the GFC was not caused by insurers. It is prudent to design and implement regulation that will ensure that such a crisis does not arise again because of the actions of companies within the financial services sector. 

Consolidation and costs

The cost of saving for retirement is probably one of the most topical issues that is currently gaining momentum in South Africa. Clients need to be aware of the cost of investing and make informed decisions on the sacrifices that they are prepared to make in order to grow their investment. 

A major step towards this clarity was achieved when ASISA recently released its standard on cost disclosures. This puts the ball firmly in the court of product providers to be open and honest. In addition, it is up to product providers, and the regulator, to find ways to effectively drive industry costs down. 

“Consolidation is an effective way to manage costs in the industry. Economies of scale means that that larger companies have more power to negotiate costs down, and there are simply to many funds in the industry for the FSCA to visit all of them. If we are going to be an effective regulator, we need to have the greatest industry oversight that is possible,” said Makhubela. 

The Default Regulations will also go some way in driving industry costs down. However, there is a fine line when it comes to this as some trustees may make important decisions for the wrong reasons. 

“We have seen a significant move towards passive investing since the introduction of the Default Regulations. This may suit the current economic cycle that the world finds itself in because it is very hard to consistently beat the market and get alpha. In order to achieve decent long-term growth, one doesn’t always have to aim upwards and shoot the lights out. However, risk profiles are important and those who can take risks need to. Appropriateness is the order of the day,” said Makhubela. 

And the Nobel goes to…

Behavioural economics is becoming a game changer in the financial services industry. It was so important that Richard Thaler was awarded the Nobel Prize for Economics in 2017 for his contributions to furthering its field.  

It’s a study that provides key insights into behaviour and consumption habits that will potentially allow insurers to develop products on an individualised basis so that each product works optimally towards driving down costs and improving value. 

Advice is king

There is no shortage of pressure on the regulator and the industry to effectively address the challenges that are presented. And with the assistance of behavioural economics, a solution may be in the pipelines. 

There is also a lot of responsibility on the part of advisers. Makhublea pointed out that there are some important mistakes that clients are making that can be resolved through expert advice. 

“Members of the public are still making suboptimal contributions to their retirement savings. While we are appreciative of the tough economic climate that exists in the country, some sacrifices need to be made for the future. In addition, when members of the public change jobs, they are not reinvesting their money. There are high drawdown rates in the industry when it comes to living annuities, and the public are still opting to go for high cost products which will ultimately impair their investment. All of this can be resolved through regular consultation with advisers,” said Makhubela. 

Writer’s Thoughts:
Even the strongest fortress (in this case challenges) can be toppled if small efforts are consistently made to bring it down. The industry is working towards resolving its challenges. It may take time, but we will eventually get there. The key is to have patience. Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.