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The role of cost in the sustainability of the SA retirement fund industry

06 September 2012 Pieter Cronje, Director at the Financial Intermediaries Association of Southern Africa
Pieter Cronje, Director at the Financial Intermediaries Association of Southern Africa

Pieter Cronje, Director at the Financial Intermediaries Association of Southern Africa

With the focus of the recent Institute for Retirement Funds (IRF) Annual Conference 2012, that took place from the 2nd - 4th of September 2012 in Cape Town, being sustainability, it is important to highlight that one of the factors that plays a major role

This is according to Pieter Cronje, Director at the Financial Intermediaries Association of Southern Africa, who presented at the IRF Annual Conference 20120 and says the cost of retirement provision is something that the government has raised as a concern a number of times and in most instances, reference has been made to the cost charged by service providers and intermediaries.

“While some service providers and/or intermediaries may have exploited members in the past, it is important to bear in mind that the cost pertaining to retirement savings is made up of various building blocks of which profit is but one.”

Cronje says one of the components that make up the cost of retirement savings that has not received enough attention is the cost resulting from regulation, also known as the cost of compliance. “Service provision to retirement funds is normally a low margin business and it is necessary for service providers to pass on the cost of compliance to the member. The same principle applies to intermediaries.”

He says South Africa has not yet introduced the concept of a cost for benefit analysis when new regulations are introduced.

“The FIA is in favour of the proper regulation of the retirement industry and strongly support the protection of members against exploitation, but has concerns about the cost of compliance to be passed onto members,” says Cronje.

In recent years there have been a number of legislative amendments in the retirement sphere, says Cronje. ‘With the introduction of an increasing amount of regulations a resultant requirement for more involvement from the regulator as well as additional processes and procedures to be introduced by service providers and intermediaries to ensure compliance with the regulations has emerged.”

He says on the one hand there is the concept of protecting members, but on the other hand, there is the need to encourage members to save more. “The higher the cost of those savings, the less members will be inclined to save. Ultimately, to ensure sustainability in the long run, there needs to be a balance between the two objectives.”

Two recent pieces of legislation that impact this balancing act is Regulation 28, specifically the introduction of quarterly non compliance reports, and the other is a proposed directive for administrators, whereby quarterly reports on compliance and the appointment of a monitoring person will be introduced, says Cronje.

“The value of some of the reports is questionable, as a result the FIA is embarking on discussions with the regulator to consider a cost benefit analysis to be conducted on some of these reports in order to ensure that the best interest of members are served at all times,” concludes Cronje.

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