Cutting costs sparks a new debate in retirement reform

01 October 2013 Jonathan Faurie, FAnews

From Monday to Thursday every week, FAnews publishes an e-newsletter dealing with news and events relevant to stakeholders in the financial services industry. Our readers are intimately involved with financial services products, compliance and advice and have strong views on issues that affect them. The Best of FAnews.co.za is a magazine feature in which we highlight a popular newsletter published online in the past 60 days. We rehash the core argument presented in the newsletter before considering some of the views raised via our reader comments.

The South African financial services industry is going through some significant changes with the Financial Services Board (FSB) and government implementing laws which they hope will bring South Africa on par with international market. These changes will also enhance South Africa’s reputation as one of the most highly developed industries in Africa.

And it seems as if the retirement sector will be the sector which will be the biggest benefactor of this change. There are on-going discussions between government, the FSB and industry stakeholders on the best way to reform the industry. While there are many challenges which need to be addressed, a major driver of this change will be costs and the fact that government wants to decrease these costs in order to offer the best retirement cover to the greatest portion of the population.

However, David Gluckman, Head of Future Positioning and Research at Sanlam Employee Benefits says that this needs to be managed properly and it should not be treasury’s sole focus as it is not the only factor which will influence industry change.

Costs are a major consideration

It seems as if the cost issue is seen as a burning one with National Treasury. It released five discussion papers over the past two years in which it pointed out that change needs to occur. One of the main concerns is that the costs levied by financial institutions are out of line with international counterparts. "The country cost comparison that Treasury makes is not a fair comparison,” says Gluckman. "We agree that charges in the sector can reduce from current levels, but changes must be made incrementally in a constructive and sustainable manner.”

Product suppliers are defending their practices arguing that charges are a function of the costs incurred when providing fund management and administration services. They add that high costs are in part due to structural inefficiencies in the local market.

"We can show clear examples where the industry has tried to improve things over the past decade,” says Gluckman. "The number of retirement funds is down from around 13 000 to just 3 000 today and there have been significant improvements in savings product design.” He says the growth of umbrella funds and the growing popularity of passive investment strategies must logically bring down charges over time.

Is the public getting full value?

Despite these ongoing discussions, regulators are still worried that the public is not getting value for its retirement savings inputs. "Our proposed reforms are heavily based on individuals,” says David McCarthy, Retirement Policy Specialist: Tax and Financial Sector Policy at Treasury. He adds that individuals are at the heart of the industry and he is concerned that the maxim of putting customers first is not always applied in practice.

Financial journalist and editor Bruce Cameron has been outspoken against high and unfair charges in the financial services sector and has reaffirmed the need to resolve this issue. He is worried that product suppliers will react to reforms by hiding costs in other ways.

Future outlook

Gluckman says that while the focus on costs is important, attention needs to be paid to other pressing matters.

"The focus should be on increasing South Africans' very low savings levels, on encouraging increased preservation and on eliminating structural inefficiencies. A key structural inefficiency highlighted in the National Treasury papers is the very low levels of preservation upon exit from pension and provident funds. New preservation rules, in whatever form, will have a huge impact in decreasing charges over time.”

Here is what some of our readers had to say:

Gavin wrote:

What the majority of industry commentators are missing is the real reason why people are short when they retire and the costs are a lesser factor in the equation. After 30 years I can confidently claim that the two main reasons for insufficient retirement provision are:

-Starting too late and saving too little.

Non- preservation at resignation or retrenchment is also an important component. The point is, even now, with lower costs, it is still a battle to get people, especially the young, to make a meaningful start to their retirement savings. Live for today seems to be the motto, with the latest electronic gadget, car or cellphone seemingly more important than looking to the future. Anybody who doubts that retirement annuities are the most cost-efficient avenue to save for retirement need only read articles by Prof Matthew Lester to get informed.

As to the intermediary force, don't these financial theorists realize that it is the intermediary force that is bringing in the savings from a largely reluctant public. Decimate the force and savings will drop. Kant en klaar.

Garrick wrote:

Reduce my income further..... Brilliant idea when you realize that the state firstly grabs 14% of my gross income generated via VAT and then up to 40% via income tax.

Thomas wrote:

I suppose that at the end of the day we are all in business, suppliers and clients to make money. Cost factors have become a serious issue in the retirement investment world and have implications for all parties concerned. The investment houses/insurance companies over the long term (no investment performs well over a short period) wants happy intermediaries and clients and so does the intermediaries.

When clients are happy, they will invest more and the more they invest the bigger the profits for the insurers/investment houses and intermediaries. For a start, it is fact that it is impossible to compare the South African investment arena to the rest of the first world countries as we have a fraction of the money in circulation and of course a fraction of the net worth individuals and businesses that can invest.