FANews
FANews
RELATED CATEGORIES

Cost cutting proposed for the retirement industry

02 November 2015 Walter van der Merwe, FedGroup Life

As a retirement fund provider that operates in a market that has been driven by high costs in recent years, we welcome National Treasury's publishing of draft default proposals for public comment that aims to lower charges and improve market conduct in the retirement industry.

While this is taking a little longer than expected, this is a significant and vital next step in a long overdue process that started in 2011. We fully support these steps as it paves the way for the kind of industry reform insurers have been advocating for years.

But are we really benefitting the client in our actions? Are we letting them have the control they need?

Returning to defaults

Once adopted, the draft default regulations, published in terms of section 36(1)(c) of the Pension Funds Act will require all retirement funds to operate according to a set of default policies. This will apply to investment, annuity and preservation strategies that ultimately benefit the long-term interests of members rather than those of service providers.

Our stance has always been that the financial services industry should, first and foremost, seek to create social value within society. From that, the industry can then seek to derive benefit and consequently profit from the financial prosperity of its clients.

This becomes even more important in the context of retirement savings.

Back seat drivers

However, the prevailing trend in the local industry is one where the needs of the client are often secondary to that of shareholders.

In this drive for profit, many providers have made retirement savings and investment products unnecessarily complex and opaque. Many of these products also tend to attract high costs and charges largely DUE to product complexity and the option of member choice, which is to the detriment of the investor and saver.

However, both National Treasury and the Financial Services Board (FSB) have recognised this trend and have acted.

Regulatory worry

Unfortunately it appears that the only way to drive reform is through the use of legislation as the industry at large seemingly lacks the desire to change of its own accord. Once implemented, this legislation will also help to improve market conduct in line with the FSB led Treating Customers Fairly (TCF) initiative and the Retail Distribution Review (RDR).

These proposed changes echo our stance, which has always been that simplicity is the best way to benefit investors and savers, while also ensuring the long-term sustainability of the industry.

Allow member choice

Allowing member choice has been a major contributing factor to the need for these reforms as consumers often make investment-related decisions based on emotions. This tends to lead to poor choices that erode fund value which is why we feel that offering opaque products that enable this behaviour is wrong.

In addition, people who opt for member choice pay a substantial premium for it as it costs financial service providers more to administer individual choices. This cost is also levied from the invested money which further erodes investment value.

Leverage economies of scale

Passive, conservative investing over the long term, using the default investment structures that are in place to leverage economies of scale, remains the best approach to retirement investing. This legislation supports this approach and vindicates our stance in this regard; one that has been unpopular with many within the industry.

It has been tough to swim upstream, but if companies stick to their core business values, they will be able to weather the storm.

Despite the costs and despite the work that is involved to offer individualised options, companies need to embrace this as the client cannot be a back seat driver anymore. They need to be in control of their investments with the help of key insight from professionals who know how to guide them to financial wellness.

Quick Polls

QUESTION

South Africa went to Davos to pitch itself as an investor-friendly destination, then signed an Expropriation Act. What message does this send to global investors?

ANSWER

Invest at your peril
SA is open for business
Two steps forward, one land grab back
Welcome to Hotel California
fanews magazine
FAnews February 2025 Get the latest issue of FAnews

This month's headlines

Unseen risks: insuring against the impact of AI gone wrong
Machine vs human: finding the balance
Is embedded insurance the end of traditional broker channels?
Client aspirations take centre stage as advisers rethink retirement planning
Maximise TFSA contributions before year-end
Subscribe now