The world around us is changing fast. The influence of the internet and ease of connectivity through mobile devices has radically shaped the way we live. Who would have imagined 10 years ago that we would have cars that drive themselves in 2014? Endless information is instantly available to us for free, no matter where we are in the world. No sooner has the latest “state of the art” smart phone been released, than it is outsmarted by a competitor who releases an even better updated version of their own device. This is the environment we live in, where yesterday’s “state of the art” is history today.
There is little doubt that the long term savings industry has to adapt to keep pace with changes all around us, but the more things change around us in a fast moving consumer society, the more they stay the same. We have known for a long time that members of retirement fund simply don't save enough to maintain a reasonable lifestyle when they retire, yet nothing has changed much over the last 15 years. If anything, the situation has got worse because after the Global Financial Crisis (GFC) as the cost of buying a pension at retirement has increased dramatically because of a structural reduction in interest rates.
The headline impact of the GFC has filtered out of 5 year performance numbers, so it is a distant historical event for many. Even though history teaches us that we will once again experience a financial crisis of some sort, for now, it is "business as usual” as we all get on with the task of maximizing return for investors at an acceptable level of risk. The GFC may be forgotten by some, but the stealth impact it has had on the long term savings industry will filter into the consumer in the long run.
There is a plethora of rules and regulations that have been created by regulators to police service providers and even trustees in an attempt to protect the life savings of individuals. Some of these rules make very good academic sense, but are a nightmare to implement. Take Regulation 28 for example. It takes a significant investment in systems to monitor daily look through on all investment portfolios and these systems have to be operated by a rare breed of people who are diligent in ensuring that every fine detail is covered each and every day. Enter FAIS, FATCA, FICA, SAM, POPI…..., all acronyms that mean nothing to the average man on the street and very little to the "reasonable” trustee, and you can very quickly realize that the fastest growing profession in our industry is that of the Compliance Officer, who must ensure that businesses comply with an onerous set of laws. It is clear that the current compliance environment doesn't bode well for smaller new entrants.
Retirement reform in South Africa is focused on delivering a better retirement outcome for all South Africans. A key component of this goal is ensuring that better value is delivered to existing and new members of retirement funds. The cost paper that was issued by National Treasury in 2013 argues that better value equates to lower costs, which is not necessarily the same thing. Ignoring this argument, however, it is clear that a core component of cost reduction for retirement funds will come through consolidation of funds and service providers in the industry. We currently have some 4,000 registered retirement funds in the country. More than two thirds of these funds have less than 200 members. There is no doubt that the heightened focus on cost control and governance will drive consolidation of funds in South Africa. Australia had about 3,600 superannuation funds in 2001, of which, the vast majority were "non-public offer” funds. In 2012, the total number of funds had reduced to well under 500, spilt about 50/50 between "open” and "non-public offer” funds.
The technology world of today has an abundance of success stories of innovative new entrants leapfrogging established businesses to add significant value and capture a big market share in a short space of time. Saving for retirement is however not the latest fad. There is no doubt that we need lots of innovation in our industry. However, the environment is such that the biggest driver of value creation for members of retirement funds is going to come from economies of scale through consolidation of funds and smaller service providers rather than innovation from new entrants who are likely to struggle to keep pace with larger providers.
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