Employee benefit clarity can lead to improved productivity
The 2014/2015 budget speech delivered by the Minister of Finance, Pravin Gordhan, has outlined key areas where government and the financial services industry can boost household savings for retirement and encourage retirement industry reform, particularly by increasing net retirement investment by reducing associated costs.
An agreement between government and the financial services industry sets out how these objectives can be achieved. One key area pertains to ensuring greater access to employee sponsored retirement savings, particularly through umbrella funds, as the administration and governance requirements, as well as associated costs, are generally lower than stand-alone funds.
Additional drivers
Additional areas driving retirement reform include proposed governance and regulatory changes in line with the Retail Distribution Review (RDR), which is supported by National Treasury. The RDR aims to equalise the disparity in the industry in terms of affordability and product complexity, specifically regarding collective investment schemes and the life insurance industry.
The RDR also provides for a new structure for financial adviser remuneration, which is where further cost reductions can be achieved. Our view is that financial advisers fulfil an important role in an increasingly complex and cluttered market. As such, they should be correctly remunerated, but it should be structured in a manner that promotes continued engagement with clients in an advisory capacity, not just at point of sale. Annuity type remuneration fees, and not lump sum commission payments, would be a better option, and may reduce initial costs for both the employee and employer in employee benefit schemes.
Cutting the fat in administration services
Further cost savings can be realised in the way employee benefit funds pay for administration services. Asset based administration fees are not relevant as the assets bear no relation to the cost of administration, and should therefore be presented differently to retirement savers.
A fixed monthly cost per member, regardless of how much they contribute or how much they have already saved, is a more equitable approach as it does not penalise those who adopted prudent retirement savings practices at an early stage. This is in line with National Treasury's aim to promote national savings.
Look at the costs of managing assets
The costs of managing assets in retirement funds should also be reviewed. Some funds choose to invest in portfolios which attract multi-manager fees. However, often only the top fees are disclosed, not the underlying asset manager fees. If the same level of transparency required by collective investment schemes, through the Total Expense Ratio (TER), was applied to these portfolios, we would allow retirement savers to compare apples with apples, based on performance and cost.
However, cost reductions need to be balanced against providing the right cover for the insured, while also ensuring industry sustainability. A number of providers in the industry have commoditised group risk cover to reduce costs. However, policyholders get what they paid for, often resulting in inadequate insurance and non-payment of claims. As an industry we need to explain to end users that this is not a commodity market.
Attracting the masses
In terms of industry sustainability greater transparency, lower costs and simplified products will attract more South Africans to save towards retirement.
If the industry is simultaneously able to remove the providers that are not able to deliver the service expected of them, a lot of the inefficiencies that often lead to increased costs will be removed from the industry as a whole.
Lowering the barrier to entry by changing the current onerous capital and licence requirements could also drive further cost reductions through greater price competition and industry innovation. If the Financial Services Board worked more closely with the industry to root out providers that engage in malicious practices and bring in others that are able to deliver through innovation, everyone will benefit.
